Following the events of 11 September, it was announced that increased measures would be taken to prevent the financing of terrorist organisations. Even before these attacks, the fight against money laundering was set to move up several gears. The EU finalised the second EU Directive on Money Laundering on 20 November 2001, which subjects more organisations to the Money Laundering Regulations as well as extending in Europe the scope of the offences for which reports of suspicions have to be made and those who have to make them. The FSA’s money laundering rules became effective on 30 November 2001 and the FSA has announced that combating money laundering will be one of its primary focuses of attention. The Government laid the Proceeds of Crime Bill before Parliament on 18 October 2001, which will significantly extend the existing anti-money laundering legislation. The Bill also introduces new methods to recover and investigate the proceeds of crime.
The fight against money laundering now has a greater priority on the world agenda. In connection with the investigation into events on 11 September, the FSA has asked firms to review their dealings with certain individuals and groups whose names were included on a list released by the United States, which the FSA published on its website. The Chancellor, Gordon Brown, also announced on 15 October a new series of measures to combat the financing of terrorism. The relevant measures are:
police powers to freeze funds at the outset of an investigation;
tougher obligations to report suspicions that funds are destined for terrorism;
police powers to monitor accounts which may be used to facilitate terrorism;
police powers to seek Court orders for financial institutions to produce records where a breach of the Money Laundering Regulations or sanctions regulations is suspected;
legislation to allow wider information sharing between government departments, in particular between the Inland Revenue, Customs and Excise and the Police; and
Bureau de Change, money transmission and cheque cashing services are now subject to the Money Laundering Regulations which came into force on 12 November 2001.
The extent to which these new initiatives extend beyond the provisions in the Proceeds of Crime Bill and the Terrorism Act 2000 is unclear. It is also uncertain how the EU Directive will be implemented in the UK since, to an extent, our anti-money laundering legislation already goes beyond the requirements of the Directive, or will after the Proceeds of Crime Bill gains Royal Assent. The biggest effect of the Directive is likely to be on the accountancy and legal professions.
Proceeds of Crime Bill
This Bill extends the existing money laundering offences to cover not only the laundering of the proceeds of serious crimes, but the proceeds of all crimes (clause 329). In particular the "receiving offence", which is aimed at third parties who become involved in money laundering, will be committed by the person who carries out the underlying predicate offence before any steps are taken to launder the proceeds of the crime (clause 323). This extension of the offence has significant implications for all advisers, particularly when taken together with the other changes proposed by the Bill, as it will lead to significantly more reporting.
It is proposed that the offence of failing to disclose suspicions be extended to ensure the reporting of knowledge, or suspicion, of laundering the proceeds of all crimes, not just drug trafficking and terrorism. Secondly, a negligence test is to be introduced. It will become an offence if a person fails to make a disclosure if that individual had reasonable grounds for knowing or suspecting money laundering, even if he himself was not suspicious (clause 324).
The Government has stated that this offence of failing to disclose will only apply to those who already have to comply with the Money Laundering Regulations 1993. However, the wording of the draft Bill was open to the misinterpretation, for example, that it applied to the whole of a firm where only part of that firm carried out relevant financial business. This concern was highlighted during the consultation phase. The Government has now included an amendment which it considers deals with this concern. Although the drafting of the Bill is unclear, the explanatory notes indicate clearly that the Bill only applies to those employees who themselves are carrying out "business in the regulated sector", the definition of which closely follows the definition in the Money Laundering Regulations of relevant financial services.
These changes will mean that firms which are subject to the failure to disclose offence will have to report clients whom they have reasonable grounds to suspect may have committed a criminal offence, irrespective of the seriousness of the crime or the amount of money received. For example, an accountant who has reasonable grounds to suspect that his client may have failed to file an annual return and that the client still has in his possession the £15 filing fee, the proceeds of the crime, will be obliged to become a whistleblower of his client.
Civil recovery
The Bill also creates a new agency, the Assets Recovery Agency (ARA), which will be responsible for recovering criminal assets. This new Agency will be given new powers, one of which will be the ability to issue tax assessments without the need to identify a source of income (clause 313).
Another new power will be the ability to recover, using the High Court, property which has been obtained from criminal conduct (clause 245). This power is not conditional on there being any criminal proceedings or conviction. However, the Court will have to be satisfied, based on the civil standard of proof, that unlawful conduct has occurred (clause 246). Once that test is satisfied, the Court must make a recovery order unless the defence in the Bill applies, or if certain conditions exist, and it is just and equitable for an order not to be made (see below).
ARA can also seek to recover property in the hands of a third party, even after they have disposed of the "original property" (clause 303). The statutory defence requires a person to show that the property was received in good faith for value and without notice (clause 306(1)).
If the third party cannot establish that the property was obtained for value, the Court still has a discretion not to make "provisions" in a recovery order if certain conditions are met and it considers it just and equitable not to do so (clause 267). The conditions, all of which must be met, are that the person subject to the recovery order:
obtained the property in good faith;
took steps after obtaining the property which he would not have taken if he had not obtained it, or took steps before obtaining the property which he would not have taken if he had not believed he was going to obtain it;
when he took the steps, he had no notice that the property was recoverable; and
if a recovery order were made in respect of the property, it would, by reason of the steps taken, be detrimental to him.
In considering whether it is just and equitable to include the provision, the Court must consider:
the degree of detriment that would be suffered by the third party if the provision was made;
ARA’s interest in receiving the realised proceeds of the recoverable property.
What is not clear from the Bill is what "provisions" should not be made. In our view, a possible outcome is that no provision will be made divesting the third party of the property.
One issue which immediately arises is whether a firm which has notified NCIS of its suspicions regarding a transaction can then argue it had no notice. Since a report will be made based on very little factual evidence, it may be possible to argue it is not ‘on notice’.
Investigation powers
The Bill also creates a number of new investigation powers. Where the power is to be used for the purpose of obtaining a confiscation order or to pursue a money laundering investigation, the application has to be to a circuit judge. Where it is to be used with a view to obtaining a civil recovery order, the application is to a High Court judge (clause 333). The powers are:
Information gathering powers: the order will permit ARA to require anyone it considers has relevant information to answer questions and/or provide information and/or produce documents. This power cannot be used for the purposes of a money laundering investigation (clauses 346-351).
Customer Information Orders: an order requiring any financial institutions or specified institutions to provide details of any accounts held by the person or company under investigation and certain other details (clauses 352-358).
Account Monitoring Orders: this is an order requiring a bank or other financial institution to provide transaction information on a suspect account for a period of up to 90 days after the order is made (clauses 359-364). This is a considerable change from the requirements of a Production Order under the Police and Criminal Evidence Act 1984, which only required (and therefore permitted in terms of client confidentiality) the disclosure of information which was created/obtained before the date of the order.
If the Bill is implemented in its existing form, it will undoubtedly increase the compliance burden on firms, as firms will find they need to make more reports, will need to ensure that their money laundering procedures take account of the changes, and will need to retrain their staff accordingly.
"© Herbert Smith 2002
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