The concept of the bankers’ duty of confidentiality (commonly referred to as bank secrecy in the primary data archive), was viewed as an important component, indeed a pillar of, the UK’s financial services industry in the 1980s, with Bruce Bucknell (ERD, FCO), corresponding that secrecy was “recognised as being upheld by an implied term of contract between banker and customer”. Therefore, in response to the 1987 US Treasury Reports and the wider international war on drugs and dirty money, the UK needed to armour itself to ensure that bank secrecy was not watered down. If bank secrecy was weakened, this would have a negative impact on the UK’s financial services industry, both at home in the UK and more significantly, in its overseas territories.
Certainly, and as stated by the British Banker’s Association (BBA) in response to questions raised by the Jack Committee on the subject of enquiries about the identity of new customers,Footnote 2 the UK’s banking and finance sector deemed it, “inappropriate to talk in terms of banks being under some sort of general duty (to unidentified parties)…as surely the only duty as such of a bank is the duty of self-protection – and this hardly needs to be embodied in a code of good practice” (excerpted from the secret, 1987 UK Treasury file. Q11 BBA). Simply put, the British banking and finance community felt that self-protection and reputation of the sector, outweighed US concerns to crack down on dirty money.
In 1987, the threats to the UK’s banking and finance industry presented in the primary data, were to be found first, in the form of policy changing implications put forward by the US in its Draft Code of Conduct on money laundering – also referred to in the letters as the Recommended Code of Conduct for Financial Institutions Conducting Currency Transactions – and submitted to the Basel Committee on Banking Supervision (also referred to in the correspondence as the Cooke Committee).Footnote 3 The second threat was identified in relation to Interpol’s interest, support and “full and thorough consideration” of the above proposed code, coupled with Interpol’s commitment to improve communication and cooperation between the law enforcement and financial communities at the international level – a policy making tactic that the US Treasury had been instrumental in developing, as they were behind the creation of the Working Group on Money Laundering created in 1986 at the Interpol Annual General Assembly. Both of these threats were deemed by the British to overstep the mark, in terms of extraterritorial implications and asserting legal obligations on banks, where none had existed before.
The Basel discussions on the proposed code of conduct were a cause of concern for the UK parties. In his letter dated 6 August to Richard Street (Economic Relations Department, Foreign and Commonwealth Office), Tom Harris (British Embassy, Washington DC) asked, “did you know about these discussions”, concerning exclusive talks that the US had initiated with the Basel Committee on Banking Supervision and also Interpol. It is evident from the exchange of communication, that the UK was privy to some but not all of the transatlantic discussions concerning the exchange of information on money laundering. In his letters, Harris would also copy in associates from the Department of Trade and Industry, an assortment of Treasury Solicitors, and peers from the Bank of England at Threadneedle Street – notably the ongoing communications largely excluded representatives from the law enforcement community including W J Bohan of the Home Office, although J Potts of the C4 Division at the Home Office was copied into some of the correspondance .
The concerns of Harris were echoed by Douglas Board from the UK’s Treasury Chambers when he wrote to Graham Kentfield at the Bank of England on 20 August 1987. In particular Board recognised that US motivations to create a global AML regime, were strengthened by the “encouraging response [of Basel] to draft US principles of ethical behaviour in banking”. Not only had the US initiated exclusive, inherently secretive talks with the Basel Committee, but the US proposals had been “tabled for “full and thorough” consideration at the Interpol General Assembly in October ” with the conference aimed at creating steps which, “participating countries, bank regulatory authorities, and banks could take to improve enforcement efforts in response to money laundering” (TR 1987:5). As Board concludes in his letter to Kentfield, “[a]re the Home Office in a position to enlighten us about progress in Interpol?” and “[c]an the Bank say something about the Basel discussions?”
The Basel discussions referred to by Board, Kent, and also Richard Farrant at the Bank of England focused on a:
“[D]raft code of conduct which the US delegation put round the Basel Supervisors’ Committee at its June meeting . We were asked for instant reactions. Ours was much like that of a majority of other countries around the table, to the effect that we could see no harm from a code of conduct along the lines of the draft, but thought that it would not do that much good. We would wish to study the details and also obtain the opinion of UK bankers”. (Farrant to Board, 26 August).
The US code of conduct, under five briefly drafted articles, required British banks and those in other countries to: 1) ensure that robust identification policies were in place before a transaction was made; 2) terminate a financial relationship if required information was not provided or was deemed inaccurate, or if there were delays in providing the information; 3) prohibit direct or indirect assistance to customers seeking to deceive law enforcement; 4) report all instances of illegal activity; 5) develop and retain all documents relating to customer identification and ensure compliance with the code. The Basel Committee peddled the code of conduct as being “a general statement of principles that Bank Supervisory Authorities could encourage their banks to follow”, ergo soft policy. However, as noted by Farrant to Board (26 August), “we noted that at one point the draft seemed to step from advocating good practice to asserting a legal obligation, where none seemed to exist at present. That must come out”. Farrant concluded that enquiries into secrecy were considered “a low priority”.
In light of Farrant’s recommendation, the draft code of conduct was shared with the UK’s most influential bankers under the auspices of the British Bankers Association (BBA). According to Farrant (26 August), the draft code was presented to the BBA “purely informally” and “they have given a predictably cool answer”. The BBA, along with those at the Treasury would have viewed the code of conduct as indicating the US’ intention to enforce US bank reporting requirements outside of the territory of the US. Although, as part of the compromise, the US Treasury Reports specifically warned the Congressional Committees against such attempts if the US was to “avoid the counter-productive results of increased enforcement of blocking statutes and serious confrontation between the US and other governments” (Tom Harris to Richard Street, 6 August – referencing the US Treasury Reports).
The threat with which the UK viewed the US AML agenda, is evidenced by the mooted legislative responses available at that time, to block the enforcement of US policies, including the code of conduct. As noted by Christopher S Kerse (Department of Trade and Industry) in a letter to Douglas Board (HM Treasury) on 10 September, “[a] further matter which causes concern is the codes of conduct…I note these are described as “draft”. Consideration should be given as to whether they could offend the Restrictive Trade Practices Act 1967 and/or other competition laws”. It is also notable that Kerse copied in Treasury Solicitors including Steve Hyett in anticipation of US policy implications offending UK trading priorities. It was decided that the Protection of Trading Interests Act 1980 (PTIA) could be used to block US enforcement efforts if needed. The PTIA was created in light of US “juridical imperialism” in the context of US anti-trust laws (Kahn 1980:476). The PTIA, which received Royal assent on 20 March 1980, “represented the most recent attempt by Great Britain to curb the extraterritorial application of United States law” (Tsoris 1981:457). At the time of the PTIA’s introduction, the British Secretary of State for Trade, John Nott, stated: “My objective in introducing this Bill is to reassert and reinforce the defences of the United Kingdom against attempts by other countries to enforce their economic and commercial policies” (Nott, Hansard 1979, column 1533). In discussing the Bill, Nott stated, “that the United States has shown a tendency in certain respects over the past three decades increasingly to try to mould the international economic and trading world in its own image” (Nott, Hansard 1979, column 1534). Indeed, it could be observed that in 1987 also, the US was trying to mould the international criminal legal system “in its own image”. However, as will be shown, the UK would continue to resist extraterritorial expansion and policy obligations, deciding instead to draft detailed responses which would remain far short of the “basic and dramatic reform of international banking law” recommended by the aforementioned 1985 parliamentary committee.
On the 20 October, Richard Farrant of the Banking Supervision Division from the Bank of England, sent a letter to Douglas Board at HM Treasury. The correspondence was pencilled as “secret” at the top. Farrant included in his letter, a draft “considered response” (also deemed secret under the UK’s Banking Act) from those at Threadneedle Street and their reaction to the “secret” code of conduct, including a “number of drafting points [from the British Bankers Association], which we consider should receive attention”. The Bank of England’s draft response stated that the “success of a code in the UK will depend very much on how reasonable its terms appear to the banks” - terms which we already know were greeted with a cool reception by the BBA. Moreover, the Bank of England cast doubt on the code as having “any real additional deterrent effect on money laundering through UK financial institutions”, because requirements on banks “to verify the credentials of their customers” were deemed to be, “too onerous and have too little evident benefit to be imposed by a code of conduct; if considered necessary they should be imposed by law”. Simply put, those at Threadneedle Street supported the idea of discouraging banks from “dealing with persons known or suspected to be disreputable”, but were absolutely clear in their assertion that any proposed code “should not require them [banks] to take steps beyond the needs of their commercial self-interest to seek to verify the credentials of their customers”. On 5 November and replying to Farrant, Board corresponded that he viewed the Bank of England’s response as, “very reasonable”.
However,the Bank of England re-drafted their response to the US proposed code of conduct on 5 November and this time went into much more detail as to the acceptability of the terms. In the re-draft, the Bank of England stated that it did not possess “specific powers covering money laundering through banks”, even though it acknowledged it was the “regulatory authority over UK banks”. Conversely, while the Bank of England did not consider itself in possession of powers to regulate money laundering through UK banks, the primary correspondence data indicates that those at the Bank of England did consider themselves in possession of policy making powers at the level of international law enforcement. The haughty, self-serving interests of the UK’s banking industry are evident in the Bank of England’s expanded and re-drafted response. For example, the Bank of England emphasises “that the existence of the code is much less relevant than its acceptance by the banking community as constituting normal practice”, again underlining a thread of this paper; that AML – essentially criminal law – policies, required approval by the banking industry first, before being considered by law enforcement and relevant policy makers. In essence, in 1987, British bankers were responsible for shaping the AML framework for the UK and indirectly for the international financial community: British bankers were deciding on matters of national and international criminal law.
The proposed code of conduct put forward by the US, with its reporting obligations, threatened the bank secrecy practices of the UK industry, and to this end the Bank of England’s response went into detail as to why it was refuting the policy recommendations – a double bluff if you like – asserting that the reporting requirements included in the US code “will provide very limited knowledge of the customer” and that “nothing less than intimate knowledge of a customer would enable a bank to determine whether he was likely to money launder”. Yet, in reality, it was this “necessary intimacy” of customer knowledge which the Bank of England and the BBA did not wish to concern themselves with – and the UK was able to undermine the US code of conduct, by drawing attention to the fact that the code provides “far less than the necessary intimacy”. In this dialogue, the Bank of England succeeded in creating a veneer of respect for the AML movement, by establishing that the US provisions were actually not strong enough, while at the same time safe in the knowledge that the BBA would never agree to extending the scope of the provisions to include obligations on banks to intimately know their customers: “Is the likely benefit worth the extra costs to the banks arising from being required to research the credentials of their customers more than is required by the existing law and their commercial self-interest?”. As noted by Goodhart (2011:286) the comments from the BBA and the Bank of England were hostile – interestingly, Switzerland, France, Luxembourg, Belgium, Canada and the Netherlands were in favour of the code (Goodhart 2011: 286). Ultimately the UK’s hostile response boiled down to one point, that the Bank of England would not sponsor a code of conduct which it could not enforce, and was doubted therefore to “have any real additional deterrent effect [in light of the existing legal provisions at the time] on money laundering through UK financial institutions” considering that, “UK financial institutions have no obligation to ensure that payment systems are not being used to deceive or defraud government agencies”. While this article’s intention is not to detail the evolution of the Basel Core Principles of Banking Supervision, it is noteworthy that the US’ initial attempt at organising a code of conduct, is considered to be “the first set of BCBS principles on money laundering” (Goodhart 2011: 286). As noted by Goodhart (2011:288), the term code of conduct was “softened” to become the “Statement of Principle” at the behest of the UK and also France – the former most likely rejecting the code of conduct title because of the inferences of obligations which can be drawn from it. Thus the US draft code of conduct, was softened and became the first set of principles distributed to a mix of non-G10 Supervisors and also G10 banks in December 1988 and January 1989 respectively.Footnote 4 Notably, the words “illegal activity” were replaced with “criminal activity” to “narrow the scope of the exercise, excluding tax evasion for example, from its ambit” (Goodhart 2011:288). It is also notable that the creation of a policy which did not include tax evasion as a crime, served to reinforce the legitimacy of contemporary offshore banking practices which allowed a range of economic crimes to flourish in overseas financial hot spots, such as the Cayman Islands.
By 1988 the proposed code of conduct had been watered down, however, it remained that in 1987, the UK was troubled not only by the US code of conduct and the potential obligations placed on UK banks to intimately know their customers, but also by the potential involvement of Interpol in the international policing of financial organized crime.