Criminal Finances Bill (Second sitting)

Richard Arkless Excerpts

Committee Debate: 2nd sitting: House of Commons
Tuesday 15th November 2016 Public Bill Committees

[Roger Mullin]

Q Are you content with what exists?

Nausicaa Delfas: Yes.

[Richard Arkless (Dumfries and Galloway) (SNP)]

Q I would like to push Ms Delfas on the point about banking culture. Do you see a link between banking culture and criminality? Do you think that a bad banking culture—to put it in layman’s terms—could be a conduit for criminality, or could exacerbate the potential for criminality in the financial sector?

Nausicaa Delfas: Obviously, we regard banking culture as incredibly important. We believe that it should be driven from the top down. We have not seen connections with criminality. We actually see that a lot of the sector operates well. Where there would be any issues around crime, they would obviously need to be detected and rooted out.

[Richard Arkless]

Q Do you agree with the Government’s decision to row back from the oversight committee and the reverse burden of proof? You rightly mentioned that it was a decision by Government. Do you agree with that decision?

Nausicaa Delfas: The regulations operate well as they are. Obviously, cases need to be made but I question what this has to do with the Bill.

[Richard Arkless]

Q The inference is clear. There is a link between banking culture and a financial system with banks being susceptible to criminality. I think it would be remiss for us to ignore that dynamic.

Nausicaa Delfas: What is really important here and what the Bill really promotes is how best to detect and prevent the financial system being used for financial crime. I think that should be our focus, so that many of the Bill’s provisions such as information sharing actually help to make the system more effective, so that crime and money laundering can better be detected and better information be given to law enforcement agencies to be able to deal with the issue. I think that is the focus here and that is absolutely right.

[Richard Arkless]

Q We heard evidence earlier that the new provisions for corporate economic crime may disproportionately impact smaller organisations, the theory being that larger organisations would find it easier to demonstrate protocols and processes that they could use to rebut the allegations that employers and their systems have failed to flag it up. Is that something that your members have discussed and that you have a view on? This may well be obvious, but as a former consumer lawyer, I can tell you the amount of times that big banks used to roll out their processes and protocols in defence of various actions, which smaller companies found it hard to do. Is that something that concerns you that might impact widely and disproportionately on your membership?

Anthony Browne: I agree with the general principle of your question. I have not had discussions with my members regarding this Bill. In terms of regulation more generally, there is no doubt that it can often benefit large organisations at the expense of smaller ones for exactly the reasons that you claim. It can act as a barrier to entry for smaller banks or as a barrier to growth for exactly the reasons you say: they do not have the resources, scale or internal expertise to deal with some very complex issues. The more complex a regulation is, the more that issue will be realised, as it were.

It is important to distinguish between proportionality ––we support proportionality of regulation––on the prudential side and proportionality on the conduct side. Proportionality on the prudential side, in terms of the capital that banks have, is a more straightforward issue. On the conduct side, it is quite difficult to argue that there should be lower standards for smaller banks because then the criminals or the misconduct would all be focused at smaller banks and you would create an unintended consequence. We massively support competition in the banking sector. We have done a lot of work to try to ensure that there is a level playing field and to remove any barriers to growth or entry.

[Richard Arkless]

Q Do you think that your members are in favour of the Bill’s corporate claim provisions? How do you think your members would react to those provisions being extended beyond tax evasion?

Anthony Browne: As I said in response to the question from Dr Huq, we do not think it is necessary, but we accept it and we have worked very closely with the Government on it. We are doing tax guidance–– 60 pages of guidance for banks to help them comply. In terms of extending it to a general criminal offence in respect of facilitating economic crime more widely, I just make this observation. There are lots of different bits of regulation and legislation on different elements of financial crime. There is tax evasion, counter-terrorism finance, money laundering and bribery. They all operate in a different way, and we would like to see a more coherent view of financial crime more generally. This is a longer term aim and this Bill is part of it. They are all different aspects of financial crime, so we are not opposed to the broad principle of extending it but we would say that it would need very careful consultation. You would need to think through very carefully how it might operate in order to make sure that there are no unintended consequences because there are a lot of very detailed complexities. You need to make sure that it would work effectively in the way that you, Parliament and the Government intend.

[Antoinette Sandbach (Eddisbury) (Con)]

Q Back in 2012, Coutts was fined £8.75 million by the FCA for systemic failings that had resulted in an unacceptable risk that it had handled the proceeds of crime. Do you think part 3 of the Bill will effectively address those risks at a banking level? In the not so distant past, we had HSBC Switzerland accounts being used to evade UK tax. Are you confident that the measures in part 3 will address those systemic failings in the banking sector?

Nausicaa Delfas: The Bill’s provisions will certainly help law enforcement to address these issues and, by virtue of that, will also have an impact on the banks themselves.

--- Later in debate ---

[Dr Huq]

Q Is there anything you would like to see?

Nausicaa Delfas: Yes, there are other points. I have mentioned the lower threshold on information sharing. There are other ideas that we have in terms of how the SARs regime could be improved so that it is better quality rather than quantity. One is information sharing. Other ideas would probably not be in the Bill but are for future thought. What are the incentives for people who are submitting the SARs? For example, there is criminal liability on an MLRO. Is that right? Obviously, it is a difficult question but there are certainly incentives to report defensively.

We have heard from banks other ideas in which we can see the merit, such as having a sort of centralised transaction monitoring system to be able to see how transactions are flowing through banks. That is another very big issue that would need to be looked at. Again, it would improve the effectiveness of the system.

There are other provisions such as reliance. A bank cannot rely on another bank’s due diligence of a customer, so the customer has to go through due diligence again with the second bank. There would be a question about whether legal liability on the second bank could be removed, so that it could rely on the due diligence of the first bank, provided it had done some checks.

All those things are ideas that we are happy to share, or have shared, with the Government for the future, in terms of improving the regime overall, its effectiveness and efficiency. Mr Browne mentioned that his members estimate that the current regime costs them about £5 billion. Things that can reduce the cost and relate to effectiveness are welcome.

[Richard Arkless]

Q You have made it clear that you are broadly supportive of the measures in the Bill and you have given the reasons why. I think most people in the Committee are broadly supportive. The point of contention comes when some of us do not think that the Bill goes far enough.

I am quite perturbed by some of the answers you have given in relation to what could be done to make it easier for the people you regulate or your members. I am not getting the impression that those are things that you think would make it easier to catch the criminals. Am I confused by this? It smacks of self-preservation. What I want to hear are things that we could put in the Bill to make it easier to catch the criminals, not to make your lives easier.

Nausicaa Delfas: I am not suggesting how we can make our lives, or anyone else’s, easier. I am suggesting exactly what you said: to improve effectiveness in terms of being able to produce useful intelligence that helps to prevent money laundering in the financial system. That is certainly our aim; it is not to make anything easier. I think the Bill contains good provisions that will go towards that aim. We can always think about these issues and what we can do in future. We are certainly supportive of the Bill.

[The Chair]

That brings to an end the time allotted for questions. I want to thank all the witnesses who have come forward to give evidence. At some point, copies of your evidence will be available. Thank you very much for attending.

Examination of Witnesses

David Leask and Toby Quantrill gave evidence.

--- Later in debate ---

[Carolyn Harris]

Q This is a blank piece of paper. If you had the opportunity to write what is in the Bill, what would be on it?

Toby Quantrill: There is already an amendment—new clause 4—that we support. The critical thing is to see action, whether within the Bill or through other means, to get the outcome we are looking for. All I would write on that paper is simply a public register of beneficial owners in overseas territories by whatever means. As I said at the start, this is a Criminal Finances Bill, and it seems odd not to include that issue in it.

David Leask: I have nothing to say on that, I am afraid.

[Richard Arkless]

Q First, David, thank you for your groundbreaking work. I was very heartened to hear what Ben, the Minister, said about reading your work and taking note of it. I was encouraged to hear that. Let me be the matchmaker in the middle here. Would you be willing to work with the Government and provide them with all the evidence you have uncovered in the past few months, based on what Ben has said?

David Leask: It is entirely published in the pages of what Mr Wallace would like to call the Glasgow Herald. It is therefore up to date. I can offer you a subscription, if you like.

[Richard Arkless]

Q Perhaps that is something that the Minister could consider. He very helpfully expressed a willingness in the Chamber to have a look at the issue, and he clearly demonstrated that he is doing so, so hopefully there can be communication from here on. For lay people watching this who find it difficult to conceptualise how transparent companies can be conduits within a system that can lend itself to criminality, is there a way that you can explain very simply what it is about SLPs that makes them susceptible to criminality?

David Leask: In some ways, the way to look at that is to ask how they are being sold and marketed off the peg, and what people find attractive about them. I am sure you could find lawyers who can identify some of the weaknesses in the Scottish limited partnership, but what fascinates me is the way in which they are sold. They are companies that have legal personalities, which means that, for example, you can open up a bank account with such a company—or a firm, strictly speaking.

[Richard Arkless]

Q How do they differ from normal companies, then?

David Leask: That is normal for a company with a legal personality. I will start again. Imagine that you are sitting somewhere like Kiev, and you open up the internet to look at agencies that are offering offshore companies. You will see a menu drop down and you will be offered a limited partnership in Canada or a limited company in the Czech Republic. You will have to choose the one that best fits your bill.

In this case, the Scottish limited partnership has legal personality, like many other types of company, which means you can open a bank account. These agencies will then offer, right there on the same internet page, to open a bank account for you. That bank account is often going to be in Switzerland, or even more often in Latvia. It is almost as if you are able to pick and choose the areas of the world where they have the weakest regulation. For Britain, that is going to be corporate law. For Latvia, it is going to be banking. You had bankers in here earlier talking about what they can do in Britain against money laundering; perhaps there are other jurisdictions where it is weaker.

You have to see a Scottish limited partnership or an English limited liability partnership as part of a kit that you can buy online. It is essentially a do-it-yourself kit for tax avoidance at best and money laundering at worst. That will include all the things that certain people like about SLPs: the fact that they have legal personality, that you do not have to say who the ultimate owner of the company is, and that there are no tough reporting restrictions. As I said, we have 25,000 SLPs in Scotland; I have never seen a single one of them file accounts, and I do not think that any ever have. I am happy to be proven wrong on that, because I have not read the paperwork for all 25,000. Some of them are perfectly legitimate businesses.

The next thing is that because there is no taxation on a Scottish limited partnership that does not operate in the United Kingdom, the agencies are quite entitled to tell people who want to invest in an overseas offshore company that they can have a zero-tax company, and they are bluntly marketed in that way. There is no taxation, so there is no need to say who you are and no need to file any accounts. There is then, of course, the extra element of these companies, which is that they do not fall under the blacklists that some Governments have imposed on their citizens.

Lastly, there is the simple prestige of owning a company or a firm in the European Union, in the United Kingdom, and in Scotland. It is about that particular cocktail being of particular interest to certain types of people. Some of those people might then look around those menus and find another type of company. That might be a British company or an English company, or it might be one elsewhere, but they will pick on the weakest regulatory regime they can for any part of their kit to launder money. In the case of companies, I am sorry to say that I think that is Britain.

[Richard Arkless]

Q That is very useful, Mr Leask. Thank you very much indeed.

Mr Quantrill, it seems from the discussion today that most people around this table would agree with most of the Bill’s content. As you have rightly said, the point of contention comes with what is not in the Bill. You have mentioned overseas territories and Crown dependencies, but those aside, could you quickly run us through perhaps two or three aspects that you think ought to be included in the Bill but are not?

Toby Quantrill: There are a couple of other areas I would highlight. I think my colleagues from Transparency International and Corruption Watch UK will give evidence; we support them and work with them closely. In part 1, could the unexplained wealth orders be extended so that they also apply to assets held in, for instance, the overseas territories? That would be helpful. We welcome the fact that the “failure to prevent” legislation is extraterritorial in nature, but perhaps that could be extended to other financial crime, beyond tax evasion.

[Richard Arkless]

Q Do you have any idea of which crimes you would extend it to?

Toby Quantrill: Just broadly.

[Richard Arkless]

How about market manipulation?

Toby Quantrill: Yes, those sorts of things. I do not have a particular list in front of me, but it seems strange to limit it to just one specific type. Beyond that, our main focus has been on the one issue, as I have probably made very clear.

[Tristram Hunt]

Q I was struck by what you said about the debate in Africa about the amount of money flowing out of that continent. We obviously give a huge amount of money to different countries in Africa through development aid. Will you give us a sense of the nature of people’s frustration about some of the money leaving the continent of Africa and their analysis of where they see London and its role in all this? What kind of reforms are being urged in many of those countries on the continent that, on the one hand, we are supporting through development aid, but from which on the other hand, it seems to me, we are allowing too much wealth to leave?

Toby Quantrill: As I say, this issue has been picked up by a number of civil society coalitions—our networks of partners and organisations across Africa—as being critical. They highlight the fact that on the one hand we are providing aid and on the other, we are facilitating these losses, which may massively extend, in terms of volume, way beyond—I think this goes beyond more than money, though. The other frustration is the fact that we are talking a lot about corruption, but, through our overseas territories and other forums—property ownership and so on is being dealt with appropriately—we are perhaps helping to facilitate or not doing enough to clamp down on some of the kind of flows of corrupt money, supporting corruption and so on. It is very hard to get into a lot of detail, because a lot of this activity, by its very nature, is secret and hard to pin down.

The best example is a very real one, which has been used before. A very good investigation was run by Global Witness into a particular case in the Democratic Republic of Congo. There was the massive underselling of mining rights—as low as 5% of market value—out of the country to a company registered in the British Virgin Islands and a number of others. Today, a new press release from Global Witness also links this to companies in the Cayman Islands, at extra money. Those rights are then sold on to other companies including, for instance, Glencore, at massively inflated prices. Somewhere in the middle somebody is making a lot of money and we do not know who. It is estimated that the losses from that particular transaction could be worth as much as $1.3 billion to the DRC, so the people of the DRC are being ripped off and they do not know who to blame for that. They do not know who to point the figure at, because they cannot find out.