Alex T Magaisa
ONE of the key developments in the financial regulatory structure in Zimbabwe in the past year was the enactment of the Bank Promotion and Suppression of Money Laund
ering Act to deal, in part, with the problem of money laundering.
The new regulatory structure imposes legal obligations on so-called “designated institutions” which include financial institutions, legal practitioners, accountants, real estate agents, etc for the purpose of suppressing money-laundering. It is interesting that until the recent legal challenge by the Law Society of Zimbabwe against the constitutionality of certain provisions of this law, legislation that has such a huge impact on the financial and regulatory landscape has elicited relatively little interest.
Without interfering in a matter that is sub-judice, I will attempt to put forward a few thoughts and ideas about this law which in reality is part of an emerging global trend in the regulation of financial crime.
Simply defined, money laundering is a process by which proceeds of criminal or other illegal activity are given the appearance of legitimacy particularly regarding their origin. At the risk of over-simplification, one could simply define it as a process of cleaning “dirty money”, that is, giving legitimacy to money that has been obtained from illegal sources. Criminals and those involved in illegal activities are keen to avoid attention from law enforcement authorities and always try to demonstrate the legitimacy of the source of their income. There are various mechanisms by which money launderers pursue their objectives, but essentially they commonly use the financial system — most commonly by opening bank accounts to place their funds into the formal system thereby ensuring integration with legitimate funds. Bank transfers, property acquisitions, etc disguise and re-package the wealth in forms that are apparently legitimate. In the process they use various professional channels to disguise the character of their illegal wealth. Money laundering is commonly used in the perpetration of organised crime and is often complex and difficult to detect.
The increase in electronic and Internet banking has expanded the opportunities for money laundering due to the ease and quickness of transactions across borders as well as the anonymity available to users. In many communities, some people may believe that money-laundering is non-existent simply because it is invisible and hard to track and because it appears to be a crime without a specific victim, dealing with this crime is sometimes ignored in some parts of the world. Yet in fact, when one considers the levels of corruption, parrallel market dealings and insider dealing which also appear to be invisible in many countries, it is easy to assume that in fact money-laundering is a process that is ever-present in most communities.
Acceptance that money-laundering exists but has not been detected and dealt with adequately is a good starting point when appreciating the necessity of legislation to deal with the problem. I would suggest that those involved in dealing with the problem of corruption should pay particular attention to this problem, which effectively provides the cover of legitimacy to otherwise illegally accumulated wealth. Others however may simply dismiss this as a stand-point that is out of touch with the reality of the basic need for survival in a period of economic problems.
The money-laundering legislation ought to be analysed within the context of recent international developments. Money laundering often takes international dimensions because it involves transactions and activities across national borders. The international character of money-laundering prompted the formation of the Financial Action Task Force (FATF) in the late 80s, an inter-governmental organisation for the purpose of developing and promoting policies to combat the crime at both national and international levels. After the September 11 attacks on New York in 2001, and the connection made between money-laundering and terrorist financing, the FATF intensified its focus and strategies towards curtailing this problem. The FATF has continually updated its initial Forty Recommendations which demonstrate a comprehensive programme on how to fight money laundering by adopting a further 8 Special Recommendations (2001) with regards to fighting terrorist financing.
A key part of the FATF’s work is to monitor member countries’ laws and regulations to ensure that they comply with the standards set at the international level. Importantly, it “names and shames” jurisdictions that are considered to be non-co-operative in the sense that their regulatory and enforcement structures do not measure up to the recommended standards. The impact of being designated a “non-co-operative jurisdiction” is that member countries may be advised to take counter-measures against individuals or business entities based in such countries. Arguably, this may have a negative impact on the economic-well-being of the designated countries.
Therefore, besides the national interest in curtailing money laundering, there is also an international push towards the adoption of legislation along the lines recommended by the international watchdogs that include the FATF, World Bank and the International Monetary Fund.
Nonetheless, the alarm raised in the context of money-laundering and the international push towards adoption of uniform policies and regulations has often led to laws that have huge and sometimes negative impact on individuals and institutions particularly those on whom legal obligations are imposed. The major obligations on “designated institutions” are that they must record, report and disclose suspicious activities and persons in relation to money laundering. The usual targets are persons and institutions normally involved in the financial markets which are the common conduit for the pursuit of money laundering. The obligations are not only onerous but sometimes they place the affected persons in very difficult positions in ways that affect their constitutional rights.
For example, if a bank suspects that due to unusually huge and frequent deposits, a customer may be involved in money-laundering, it has the obligation to report to the authorities with the duty to conduct investigations. This obviously runs counter to the important principle of confidentiality in the banker-customer relationship. In this situation, let us assume that the customer then seeks to withdraw his funds. If the bank allows him to withdraw the funds under investigation, it may be considered to be assisting that person to launder money.
On the other hand, if it refuses to give him the money, it not only beaches the bank’s contractual duty to the customer (which may attract civil legal proceedings against the bank) but it may also give a signal to the suspected person that something wrong has been detected in his scheme in which case he might flee the jurisdiction. For that the bank might be considered by the authorities to have “tipped off” the suspect and therefore might be liable to prosecution under the laws.
So given this and related problems one can understand the calls by the so-called “designated institutions” with duties to report and disclose for better clarification and certainty in the laws and their consequences. There, the judiciary might play a key role in giving proper directions on how to deal with this matter without incurring further legal claims and costs.
The legal and compliance costs imposed on designated institutions are also a key area of consideration. They have to keep records over a period of time, which adds to storage costs while employees must be properly trained to detect and report suspicious activities in terms of the law. They will also need to employ properly trained staff responsible for compliance. These additional costs are a burden that will be borne initially by designated institutions but are most likely to be passed on to the consumers. In addition, transferring key policing duties to the private sector from the public sector (police) could lead to reduction in the development of the capacity of the police force which has the primary duty in this area.
In addition, care ought to be taken in designating institutions as there is a danger of causing unnecessary conflicts or interests particularly where confidentiality and trust are key elements such as in the legal profession. It is unnecessary and illogical to impose such onerous disclosure obligations on lawyers, which essentially make them prosecutors against their clients when the relationship between the lawyer and client is founded on the basis of trust and confidentiality. Legal ethics already bind lawyers to pursue certain avenues should they feel that they cannot represent a client for whatever reason and it is unnecessary to impose further obligations that undermine this relationship. Fear among citizens that their lawyers will unnecessarily report “suspicions” might end up deterring otherwise innocent citizens from approaching their lawyers for assistance. Given that most of the players that are designated institutions will invariably rely on lawyers, one might have difficulties in determining the role and obligations of lawyers in such situations.
The key cause of these problems is the phenomenon of legal transplantation by which laws developed and designed within specific contexts are transplanted into contexts that are fundamentally different. Most legislation in this area is similar across both developed and developing countries yet the mere enactment of legislation does not necessarily entail that it will be effectively and properly implemented. A more important problem is that in countries where human rights are under threat, there is a possibility and well-founded fear that some authorities might abuse powers under the onerous and wide-ranging laws and still claim that they are following an international trend in fighting terrorism and money-laundering.
One could imagine a case where a lawyer is arrested because he or she failed to report a “suspicious” transaction, simply as a way of harassment. Such action might be taken by the authorities and will be perfectly legal yet in fact it disguises the true intent of the authorities. The fears that the money laundering laws potentially affect the rights of citizens, including privacy, expression, property, etc can be more real in some communities than others.
To simply promote the spread of uniform laws, without considering the contexts within which they will operate may have consequences that international bodies may not have foreseen or intended. It is necessary, in the global efforts to combat money laundering and terrorism, to avoid over-reaction and to be sensitive to the factors applying in different jurisdictions. It is also important for international bodies monitoring such laws to check not only whether the laws have been enacted and are being implemented but also whether the implementation is in line with recognised human rights standards.
Alex Tawanda Magaisa is Baker & McKenzie lecturer in Corporate & Commercial Law at The University of Nottingham firstname.lastname@example.org