Cablegate: Incsr Vol Ii for Uk

DE RUEHLO #4310/01 3241847
R 201847Z NOV 07





E.O. 12958: N/A

REF STATE 138130

1. Following is post draft of Volume II of the UK
INCSR for 2008. POC is Econ Couns John McNamara

2. (SBU) Begin Text:

United Kingdom

The United Kingdom (UK) plays a leading role in
European and world finance and remains attractive to
money launderers because of the size, sophistication,
and reputation of its financial markets. Although
narcotics are still a major source of illegal proceeds
for money laundering, the proceeds of other offenses,
such as financial fraud and the smuggling of people
and goods, have become increasingly important. The
past few years have witnessed the movement of cash
placement away from High Street banks and mainstream
financial institutions. The use of bureaux de change,
cash smugglers (into and out of the UK), and
gatekeepers (including solicitors and accountants),
the purchase of high-value assets as disguises for
illegally obtained money, and credit/debit card fraud
has been on the increase since 2002.

According to analysis by the UK's Serious Organized
Crime Agency (SOCA), serious organized crimes in the
UK generate about GBP 15bn per annum. Businesses that
are particularly attractive to criminals are those
with high cash turnovers and those involved in
overseas trading. Illicit cash is consolidated in the
UK, and then moved overseas where it can more readily
enter the legitimate financial system, either directly
or by means such as purchasing property. Cash can be
smuggled in a number of ways: it can be transported by
courier, freight or post and moved through the various
points of exit from the UK. Cash smuggling techniques
are adaptable, smugglers can easily change techniques
if they suspect law enforcement is targeting a
particular route or method.

Criminal proceeds are mostly generated in the large
metropolitan areas in the UK. Cities such as London,
Liverpool and Birmingham have large drugs markets and
also serve as supply points for markets in smaller
cities and towns, drawing in significant flows of
illicit cash. They often hold funds in numerous bank
accounts, spread across a range of financial
institutions, in an effort to ensure that no one
institution is aware of the full scale of their wealth
or the patterns of their transactions.

Many aspects of the laundering of drug proceeds remain
unclear, but it is evident that traffickers are able
to launder substantial amounts of money in the UK
despite improved anti-money laundering measures
introduced under the Proceeds of Crime Act (2002).
Much of the money made in the UK benefits criminals
who operate in the UK.

Because cash is the mainstay of the drugs trade,
traffickers make extensive use of money transmission
agents (MTA), cash smuggling, and Informal Value
Transfer Systems ('underground banking') to remove
cash form the UK. Heroin proceeds from the UK are
often laundered through Dubai en route to traffickers
in Pakistan and Turkey. Cocaine proceeds are
repatriated to South America via Jamaica and Panama.

As money laundering laws become stricter, drug related
laundering becomes more difficult. Because dealers in
the UK generally collect sterling, most traffickers
are left with excess small currency (usually GBP10
notes). This has created cash smuggling operations to
move large sums of sterling out of the country. SOCA
analysis suggests that more sterling has exited the UK
in recent years than entered due to the relative ease
of converting sterling in other countries.

The UK has implemented many of the provisions of the
European Union's two Directives on the prevention of
the use of the financial system for the purpose of
money laundering, and the Financial Action Task Force
(FATF) Forty Plus Nine Recommendations. Narcotics-

LONDON 00004310 002 OF 005

related money laundering has been a criminal offense
in the UK since 1986. The laundering of proceeds from
other serious crimes has been criminalized by
subsequent legislation. Banks and nonbank financial
institutions in the UK must report suspicious

In 2001, money laundering regulations were extended to
money service bureaus (e.g., bureaux de change, money
transmission companies), and in September 2006, the
Government published a review of the regulation and
performance of money service businesses in preventing
money laundering and terrorist financing. Since 2004,
more business sectors are subject to formal suspicious
activity reporting (SAR) requirements, including
attorneys, solicitors, accountants, real estate
agents, and dealers in high-value goods, such as cars
and jewelry. Sectors of the betting and gaming
industry that are not currently regulated are being
encouraged to establish their own codes of practice,
including a requirement to disclose suspicious

Following an extensive consultation period in late
2006, the Treasury published Money Laundering
Regulations in July 2007. The regulations implement
the Third EU Money Laundering Directive, agreed under
the UK's EU Presidency in 2005. The provisions
include: extended supervision so that all businesses
in the regulated sector comply with money laundering
requirements; strict tests of money services
businesses; extra checks on customers identified by
firms as posing a high risk of money laundering; a
requirement to establish the source of wealth of
customers who are high ranking public officials
overseas; and a strengthened and risk-based regime in
casinos, in line with international standards. The
regulations took effect December 15, 2007.

The Proceeds of Crime Act 2002 (POCA), created a new
criminal offense of failing to disclose suspicious
transactions in respect to all crimes, not just
"serious," narcotics- or terrorism-related crimes, as
was the case previously. This is applicable to all
regulated sectors. Along with the Act came an
expansion of investigative powers relative to large
movements of cash in the UK. Sections 327 to 340 of
the Act address possession, acquisition, transfer,
removal, use, conversion, concealment or disguise of
criminal or terrorist property, inclusive of but not
limited to money. The POCA also criminalizes tipping
off. The "Money Laundering Regulations 2003," along
with amending orders for the POCA and the Terrorism
Act, impose requirements on various entities,
including attorneys, and introduce a client
identification requirement, requirements on record
keeping, internal reporting procedures and training.

The introduction of the Fraud Act 2006, which took
effect on 15 January 2007, saw significant changes to
offences in the fraud and forgery offence group.
Changes were also made to the way in which the police
record fraud offences.

The UK's banking sector provides accounts to residents
and nonresidents, who can open accounts through
various intermediaries that often advertise on the
Internet and also offer various offshore services.
Private banking constitutes a significant portion of
the British banking industry. Both resident and
nonresident accounts are subject to the same reporting
and record keeping requirements. Individuals typically
open nonresident accounts for tax advantages or for
investment purposes.

Bank supervision falls under the Financial Services
Authority (FSA). The FSA's primary responsibilities
relate to the safety and soundness of the institutions
under its jurisdiction. The FSA also plays an
important role in the fight against money laundering
through its continued involvement in the authorization
of banks, and investigations of money laundering
activities involving banks. The FSA regulates some
29,000 firms, which include European Economic Area
(EEA) firms passporting into the UK (firms doing
business on a cross-border basis), ranging from global

LONDON 00004310 003 OF 005

investment banks to very small businesses, and around
165,000 individuals. The FSA also regulates mortgage
and general insurance agencies, totaling over 30,000
institutions. The FSA administers a civil-fines regime
and has prosecutorial powers. The FSA has the power to
make regulatory rules with respect to money
laundering, and to enforce those rules with a range of
disciplinary measures (including fines) if the
institutions fail to comply. In October 2006, the
financial services sector adopted National
Occupational Standards of Competence in the fields of
compliance and in anti-money laundering.

The Serious Organized Crime and Police Act of 2005
(SOCAP) made changes to the money laundering
provisions in the POCA. One of these changes was the
creation of the SOCA, which became the UK's financial
intelligence unit (FIU). In 2006, SOCA took over all
FIU functions from the National Criminal Intelligence
Service (NCIS). In light of that change SARs are now
filed with SOCA. In the context of the SARs regime,
SOCAP gives SOCA all the FIU powers and functions that
were inherited from NCIS. SOCA has three functions:
the prevention and detection of serious organized
crime; the mitigation of the consequences of such
crime; and the function of receiving, storing,
analyzing and disseminating information. Under the
law, SOCA's functions are not restricted to serious or
organized crime but potentially bear on all crimes,
and those functions are to include assistance to
others in the discharge of their enforcement
responsibilities. In 2005, the NCIS received just
under 200,000 SARs and had seen a steady increase each
year since 2001. The new law also relaxed slightly
reporting requirements to allow banks to proceed with
low value transactions (not exceeding 250 pounds)
involving suspected criminal property without
requiring specific consent to operate the account.
However, the reporting of every such transaction is
still required, and other obligated entities were not
granted these relaxed standards. Also under SOCAP,
foreign acts would no longer be considered money
laundering if not contrary to the law of the foreign

The Proceeds of Crime Act 2002 has enhanced the
efficiency of the forfeiture process and increased the
recovered amount of illegally obtained assets. The Act
consolidates existing laws on forfeiture and money
laundering into a single piece of legislation, and,
perhaps most importantly, creates a civil asset
forfeiture system for the proceeds of unlawful
conduct. It also creates the Assets Recovery Agency
(ARA), to enhance financial investigators' power to
request information from any bank about whether it
holds an account for a particular person. The Act
provides for confiscation orders and for restraint
orders to prohibit dealing with property. It also
allows for the recovery of property that is, or
represents, property obtained through unlawful
conduct, or that is intended to be used in unlawful
conduct. Furthermore, the Act shifts the burden of
proof to the holder of the assets to prove that the
assets were acquired through lawful means. In the
absence of such proof, assets may be forfeited, even
without a criminal conviction. The Act gives standing
to overseas requests and orders concerning property
believed to be the proceeds of criminal conduct. The
Act also provides the ARA with a national standard for
training investigators, and gives greater powers of
seizure at a lower standard of proof. In light of
this, Her Majesty's Revenue and Customs (HMRC) has
increased its national priorities to include
investigating the movement of cash through money
exchange houses and identifying unlicensed money
remitters. The total value of assets recovered by all
agencies under the Act (and earlier legislation) in
England, Wales, and Northern Ireland was approximately
$96.6 million in 2004 and approximately $149.6 million
in 2005. The Assets Recovery Unit had announced
additional seizures worth approximately $30 million in
2006 with an additional $200 million under restraint
pending the outcome of court cases.

In one illustrative case, on 25 September 2007 the
last of eight men was sentenced at Croydon Crown Court

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as a result of Operation Labici. The main defendant
received ten years imprisonment and the total for all
eight defendants was 39 years for money laundering.
Operation Labici was an investigation into an
organized group of money launderers operating in the
UK but controlled from Dubai and Pakistan. They used a
hawala banking network to move drugs money between the
UK and Pakistan/Dubai as well as other countries.
Hawala banking is a paperless method of moving money
from one place to another and relies on a system of
trust between the bankers, known as hawaladars. The
money is not moved either physically or
electronically. Legitimate use of such a system can
be an inexpensive way of moving money.

The UK end of the organization provided laundering
services to UK drug dealers. Records seized showed
that almost GBP15 million in cash had been passed. A
significant part of the evidence was from mass
spectrometry which allows detectors to sample chemical
residues on paper. One million pounds in seized cash
had a high level of heroin contamination.

The Terrorism (United Nations Measures) Order 2001
makes it an offense for any individual to make any
funds for financial or related services available,
directly or indirectly, to or for the benefit of a
person who commits, attempts to commit, facilitates,
or participates in the commission of acts of
terrorism. The Order also makes it an offense for a
bank or building society to fail to disclose to the
Treasury a suspicion that a customer or entity with
whom the institution has had dealings since October
10, 2001, is attempting to participate in acts of
terrorism. The Anti-Terrorism, Crime, and Security Act
2001 provides for the freezing of assets. In March
2006, the Terrorism Act received Royal Assent. This
Act aims to impede the encouragement of others to
commit terrorist acts, and amends existing
legislation. Changes include: the introduction of
warrants to enable police to search any property owned
or controlled by a terrorist suspect, the extension of
terrorism stop and search powers to cover bays and
estuaries, with improved search powers at ports, the
extension of police powers to detain suspects after
arrest for 28 days (although intervals exceeding two
days must be approved by a judicial authority), and
the increased flexibility of the proscription regime,
including the power to proscribe groups that glorify

As a direct result of the events of September 11,
2001, the FID established a separate National
Terrorist Financing Investigative Unit (NTFIU), to
maximize the effect of reports from the regulated
sector. The NTFIU chairs a law enforcement group to
provide outreach to the financial industry concerning
requirements and typologies. The NTFIU is now under
the remit of SOCA. The operational unit that responds
to the work and intelligence development of the NTFIU
has seen a threefold increase in staffing levels
directly due to the increase in the workload. The
Metropolitan Police responded to the growing emphasis
on terrorist financing by expanding the focus and
strength of its specialist financial unit dedicated to
this area of investigations.

Charitable organizations and foundations are subject
to supervision by the UK Charities Commission. Such
entities must be licensed and are subject to reporting
and record keeping requirements. The Commission has
investigative and administrative sanctioning
authority, up to and including the authority to remove
management, appoint trustees and place organizations
into receivership. The Government intends to revise
its reporting requirements in 2007 to develop a risk-
based approach to monitoring with a new serious
incident reporting function for charities.

The UK cooperates with foreign law enforcement
agencies investigating narcotics-related financial
crimes. The UK is a party to the 1988 UN Drug
Convention and the UN International Convention for the
Suppression of the Financing of Terrorism. In February
2006, the UK ratified both the UN Convention against
Transnational Organized Crime and the UN Convention

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against Corruption. The UK is a member of the FATF.
SOCA is an active member of the Egmont Group and has
information sharing arrangements in place with the
FIUs of the United States, Belgium, France, and
Australia. The Mutual Legal Assistance Treaty (MLAT)
between the UK and the United States has been in force
since 1996 (the United States and UK signed a
reciprocal asset sharing agreement in March 2003). The
UK also has an MLAT with the Bahamas. Additionally,
there is a memorandum of understanding in force
between the U.S. Immigration and Customs Enforcement
and HM Revenue and Customs.

The United Kingdom should develop legislation and
implementing regulations to ensure that the gaming and
betting industries are completely covered in the same
manner as the financial and designated non-financial
businesses and professions. This should include a
legal requirement to disclose suspicious transactions
rather than relying on the industries' own codes of
practice. In addition, authorities should track and
examine the effects of the SOCAP change regarding acts
and assets in or from foreign jurisdictions, and
revisit this legislation to determine whether it has
been effective, or whether it has enabled


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