Business and Finance

Money laundering on the high street

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LONDON — The money remittance and foreign exchange shops that dot most British high streets are the lifeblood of immigrant communities who send funds home. But in London, they are also playing a key role in a vicious drugs trade and fueling a surge in violent crime.

Sweeping changes to the U.K.’s banking regulations in recent years pushed most dirty money outside the official financial system. As bankers developed detailed new processes to verify the source of funds, money launderers and criminals turned elsewhere to deposit and move their profits: the burgeoning cottage industry of remittance and foreign exchange shops known as money service businesses, or MSBs.

In the U.K., these shops “rarely ask for proof of address and source of funds,” according to a money laundering consultant who has worked as a British police officer for 30 years, including 10 years on various aspects of financial crime and organized crime.

A lack of coordination even among members of large money transfer networks such as Western Union or MoneyGram also allows criminals to make multiple smaller transfers to the same destination undetected, the retired officer said.

“There is clear evidence to support the claim that MSBs are playing a significant role in the rise of violent crime, gang-related crime, drug dealing, in London” — Nick Stevens, detective

It’s a loophole that is heavily exploited by London’s violent drug gangs, allowing them to ramp up their activities and leading to an exponential rise in crime, according to multiple insiders with knowledge of the situation.

London saw a 10-year peak in murders in 2018 with 132 reported deaths, a majority of which were gang-related. In the first nine months of 2019, the city saw 90 murders and a third of all recorded knife crime offences in England and Wales, with an average of 42 knife attacks per day for the whole year.

 

There is a direct link between the crime wave that’s overtaken London and the growing number of MSBs crowding the city’s shopping streets, experts say. The city has 9,000 such shops, according to the latest data, but police and industry representatives say the real number is likely to be much higher because many operate without registration.

“There is clear evidence to support the claim that MSBs are playing a significant role in the rise of violent crime, gang-related crime, drug dealing, in London,” Nick Stevens, a detective and the head of the Met police force’s organized crime division, said in a speech at the Cambridge Economic Crime Symposium last year.

One money service shop in London, closed by the police in 2019, laundered £310 million over a one-year period, using the funds to procure bulk cocaine. Nearly £900 million worth of cocaine was also confiscated from other MSB-linked investigations in the first nine months of 2019. According to Stevens, “principal subjects were connected to a number of shootings in London.”

As the sector grows, police and campaigners are warning that financial authorities’ failure to properly enforce regulations governing these transactions risks creating a snowball effect, accelerating the rate of violent crime and money laundering.

Essential services

There’s nothing about Queensway, a busy street in western London’s Bayswater, to suggest it is one of the hotspots for the U.K.’s money laundering industry.

On any given day — before the coronavirus lockdown ground life to a halt — people of all races and social classes would rush in and out of the Tube station, crowd into shops, fast-food restaurants and pubs, chat with friends, read newspapers and scroll through their phones, as on any other main London road.

And yet, this street — which is home to about a dozen money remittance and foreign exchange shops — is frequented by some of the most feared gangs in London, officers in the Metropolitan Police told POLITICO.

Some of these shops have been recently renovated, with bright neon signs and shiny new marble floors. Some are seedier and more rundown, improvised stalls under stairwells or in the corner of shops selling drinks, cigarettes and processed food. Few bother to advertise their rates for sending money abroad or exchanging foreign currency. Their clients are, for the most part, regulars.

In April, the government classified these businesses as essential services, allowing them to stay open through the coronavirus lockdown. But for gang members in London, they have long been indispensable.

“Gangs survive solely on money from drugs,” said Paul Hannaford, a reformed gang member from London who now speaks in schools about the dangers of organized crime. Access to a system that allows them to discreetly manage their profits keeps the wheels turning.

The U.K.’s National Crime Authority estimates that at least £1.5 billion in criminal proceeds are laundered through MSBs in the U.K. every year | Daniel Leal-Olivas/AFP via Getty Images

These profits can be substantial. According to Hannaford, an addict will typically spend around £100 on drugs a day, which means an average-sized London gang can see returns of around £200,000 a month.

Even after the “Rolex watches, diamond rings, expensive designer clothes, flash cars,” there will be “boxes full of money lying around in flats in London,” Hannaford said in a telephone interview.

That is where the money transfer shops come in. “They send it abroad via Western Union,” said Hannaford, confirming what police officers, business owners and other experts told POLITICO. The money, in some cases, is run through various front companies in low-oversight jurisdictions overseas and then wired back to the U.K. as clean income from apparently legitimate activity.

Although a majority of money shops operate within the law, according to officer Stevens, the sector has become “a clear risk, a clear vulnerability.”

Booming business

A number of MSBs turn a blind eye to regulation that requires them to keep accurate records of transactions, often under pressure from gang members, said the retired officer. “When you look at these addresses, the number of customers is minimal, but there are huge sums passing through.”

These MSBs, which fabricate records or fail to keep them entirely, help “criminals to launder large sums of criminal cash linked predominantly to drug trafficking but also to fraud and human trafficking,” said Stevens.

As a number of prominent gangs in recent years relinquished so-called postcode rivalry for the sake of pursuing profits, they have started to operated “almost like a franchise, like McDonald’s or Benetton,” according to a report into their activity by Andrew Whittaker, an associate professor at London South Bank University.

This has made them even more reliant on money shops through which they can transfer funds between members in different locations without drawing attention.

The U.K.’s National Crime Authority estimates that at least £1.5 billion in criminal proceeds are laundered through MSBs in the U.K. every year, the majority of it in London. In February, it published an Amber Alert to warn registered money service businesses that serious organized crime networks were specifically targeting the sector for its weaknesses in detecting dirty cash.

“We were surprised at how many of the MSBs we raided have stayed open” — Anonymous police officer

The estimate is “very conservative,” said Stevens, who warned that the real number is likely to be significantly higher.

The rapid growth of these money shops has made oversight increasingly difficult. But authorities don’t appear to be watching especially closely either, according to Whittaker’s report.

The government should be seeking to deter gangs “through economic measures, such as financial investigations that identify illegal funds and money laundering mechanisms,” Whittaker noted in his report.

Yet few resources are deployed to policing the sector or trying to uncover suspicious behavior, experts say. Regulators and police should go out in the field to look for “red flags” in MSBs, such as a lack of video surveillance on the premises or sloppy records, “but they almost never do,” said the retired police officer.

The responsibility for cleaning up the sector lies with three institutions that only rarely work together: the tax office, known as Her Majesty’s Revenue and Customs (HMRC); the Financial Conduct Authority (FCA), which oversees most companies in the finance sector; and the police.

In London, crime is booming | Chris J. Ratcliffe/Getty Images

But this division of duties, especially after years of cutbacks to public sector budgets, tends to create confusion and has seen the enforcement of MSB regulations deprioritized in favor of other “core” assignments.

“We were surprised at how many of the MSBs we raided have stayed open,” the unnamed police officer said.

Several members of the police who spoke to POLITICO also suggested that the authorities responsible for overseeing the money transfer networks have chosen to act with a “soft touch” when it comes to MSBs because these businesses are typically owned and used by immigrant communities.

“They fear being labeled as racist,” one detective said, asking to remain anonymous. HMRC declined to comment on this allegation.

Gray area

Part of the problem is that — except for larger outfits that pool money from smaller MSBs — there is little incentive to comply with regulation, said one MSB director who has managed a money service business in London since 2004.

Three full-time money laundering reporting officers using commercially available software would be able to clear upward of £1 billion a month in transactions, or 12,500 transfers at an average of £80,000. But there is no requirement to employ them — and some find it is easier not to, the business owner said.

Smaller outfits also have difficulties doing proper verifications on transactions because the U.K. has no central ID system, meaning it is hard to spot the use of false ID cards or utility bills commonly used as proof of identity and address.

Some MSBs have been known to use the personal data provided by honest clients in the processing of criminal money without the knowledge of the person involved, the businessman and the two police officers said.

The MSB owner told POLITICO he has been approached by people whom he suspected of wanting to launder money, and due to the larger-than-average size of his company he felt empowered to decline. “It is our duty to report these instances, and we always do.”

But smaller firms, including some of his partners, are more vulnerable to coercion or the temptation of a much-needed revenue boost, he said, adding that Western Union and also MoneyGram choose to keep money moving instead of being as thorough as possible, since the majority of funds in the market are of legitimate origin.

London’s alarming crime statistics have increased pressure on the government, which has started to take tentative steps to tackle the issue.

“If they get caught once in a while, they prefer to pay the fine,” the MSB director said.

In order to get around the more stringent money-laundering requirements, some MSB owners register as clients of large transfer companies — such as Western Union and MoneyGram — rather than independent agents, as the latter attracts a deeper level of scrutiny, the business owner said.

The responsibility for conducting money laundering checks is ultimately on MSB owners, even when they’re clients of larger money transfer networks. The larger networks are not considered directly culpable if users on their platform are caught up in crime.

This creates a gray area where it is difficult for investigators to determine who is responsible for checking the legitimacy of the money transfers.

Even when investigators do uncover evidence of wrongdoing, an MSB can operate freely until its owner is convicted in court, which, in the U.K.’s overwhelmed justice system, can take years — if it happens at all, said the retired officer.

MSB owners also have a duty to register with HMRC if their turnover is over £100,000, and until January of this year were allowed to trade while their application was in process.

Both Western Union and MoneyGram said in response to questions from POLITICO that they have strong controls in place to detect and deter illicit activity.

Western Union insisted that it tries to deter illegal activity | Sean Gallup/Getty Images

A spokeswoman for Western Union, the global cash transfer network, said the company “is firmly committed to preventing the misuse of its service” and that it educates its employees and agents to “recognize and promptly report suspicious activity or behavior.” It is also investing in technology to “enhance compliance” and keep “bad money out of the system,” she said.

Every single transaction that takes places via MoneyGram, the second-largest high street money-transfer network in the U.K., “is subject to compliance controls to detect and prevent suspected fraud or illicit transactions,” a spokesman said, adding that the company has “among the lowest fraud rates in the industry” thanks to its “state-of-the-art compliance program.”

The company has legal experts on staff to carry out investigations into suspected money laundering “to assist law enforcement catch money launderers, drug traffickers and other criminals” in cooperation with national authorities, he added.

Both firms, which together dominate the remittance sector globally, have paid millions in fines in Europe and the U.S. — though not in the U.K. — for failures in money-laundering controls, and have promised to further tighten their standards.

First steps

London’s alarming crime statistics have increased pressure on the government, which has started to take tentative steps to tackle the issue.

A joint operation last year between the FCA, HMRC and the police against MSBs allegedly flouting regulation has “made a difference in the local drugs market,” said the detective.

The U.K.’s yearly report into money laundering and terrorism financing — set to be published in October — will provide a basis for the Treasury to assess “whether regulatory changes are required to mitigate [those] risks,” a government spokesperson said. The government is monitoring “the money laundering and terrorism financing risk associated with money service businesses on an ongoing basis,” the spokesperson added.

Spokespeople for the FCA, the Met Police and London City Hall declined to comment for this story.

Although authorities have shuttered several MSBs over the past years — Touma, an MSB based in West London, for example, was shut down and its owner hit with a £7.8 million fine in September — experts say dishonest operations continue to thrive unimpeded elsewhere in London, despite periodic “outreach” campaigns.

“We think the law should be applied … You have all the powers, now go and arrest people” — Bob Lyddon, chairman of the Association of U.K. Payment Institutions

“The sheer number of MSBs in London is suspicious,” said the detective, pointing to low profit margins.

For its part, the industry accuses the government of not doing enough. More resources should be allocated to law enforcement to deal with the issue, said Bob Lyddon, the chairman of the Association of U.K. Payment Institutions.

His organization has called for a targeted investigation against crooked companies, instead of blanket raids and publicity “stunts” that affect the reputation of the whole sector.

“The current situation is the fault of the very people who are now saying this is a big problem,” he added. “Our members tell us of many unlicensed and unregistered firms, and that is illegal full stop, so why aren’t they being investigated?”

Without enforcement, he said obeying the law becomes optional, and those who chose not to are more successful, pushing out the clean operators.

“It is not in the interest of our members that there are bad actors in our industry,” Lyddon said. “We think the law should be applied … You have all the powers, now go and arrest people.”

This article is part of POLITICO’s premium policy service: Pro Financial Services. From the eurozone, banking union, CMU, and more, our specialized journalists keep you on top of the topics driving the Financial Services policy agenda. Email [email protected] for a complimentary trial.

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