UK: Crackdown on Ill-gotten Gains Could Land Firms in Court

System Failure May Lead to Prison

From March 1 the UK is getting tougher on any company that turns a blind eye to deals being financed by "dirty money".

And ignorance of the new laws will not be bliss for businessmen and women. The directors and officers of those firms which traditionally don’t have direct contact with finance but act as brokers, could face years in prison if they are found not to have in place a formal system which can deal with suspicions about where cash is coming from.

The new Money Laundering Regulations 2003 ("MLR") herald the start of a new regime regarding Money Laundering.

While both the Terrorism Act 2000 ("TA") and the Proceeds of Crime Act 2002 ("POCA") already make it a criminal offence to use, acquire, conceal, convert or transfer or enter into an arrangement to facilitate the concealment, use or transfer of criminal property these new laws go further. The onus is on companies to report money laundering if at all suspicious. If they don’t the directors and officers could face up to 14 years in prison.

Once reported, the property or money cannot be dealt with unless consent is obtained from the relevant authority or the time limits laid down by the acts have lapsed, unless a court order has been obtained. Further, it may be a criminal offence to inform the client that they have been reported or are to be reported, as that is regarded as "tipping off". The maximum sentence is 5 years imprisonment and/or a fine.

But the MLR means companies are now in the firing line simply by not putting in place an administrative system within which vigilant policing of deals can take place. This includes training for staff.

According to the new regulations, the types of business that need to put in place systems and report suspicious transactions have been expanded to include businesses that do not handle client money, but merely advise on investments or facilitate/broker deals. The business activities include the following:

1. Estate agency work.
2. The provision of advice about tax affairs.
3. The provision of audit services.
4. The provision of legal services which involves participation in a financial or real property transaction.
5. The provision of services in relation to the formation, operation of management of a company or a trust.
6. Dealing in goods of any description by way of business (including dealing as an auctioneer) whenever the transaction includes a total cash payment of 15,000 euro or more.

The MLR does not change a business's obligations to report a suspicious transaction as required by the TA and POCA. The MLR underpins the reporting requirements of the TA and POCA.

Whilst both the TA and the POCA already provided for reporting of suspicious activity to the authorities, the MLR requires firms to put in place:

1. Identification procedures – Identification procedures must be put in place and maintained.
2. Record keeping procedures – Procedures must be put in place which require the retention of records for at least five years from the date of the business relationship ending or, if a one off transaction 5 years from the conclusion of the transaction.
3. Internal reporting procedures – Internal reporting procedures must be set up and maintained. A person must be nominated to receive disclosure and determine whether a matter or transaction should be reported.
4. Training of staff – Take appropriate measures so that relevant employees are made aware of the MLR and the relevant provisions of POCA and TA, and given training in how to recognise and deal with transactions which may be related to money laundering.

Failure to do so is a criminal offence, the maximum penalty being 2 years imprisonment and /or a fine.

The legislation not only requires businesses subject to the MLR to inform on their client's business activities but also to put in place the necessary framework to ensure that your obligations under TA and POCA are met.

Reporting a suspicious matter or transaction to the relevant authority may ultimately lead to breakdown of the relationship with the clients.

Once a matter has been reported to obtain pre-transaction consent pursuant to legislation, the authorities have a period to decide whether you may continue with the transaction. During this period, which can be up to 7 working days plus a further 31 days, you cannot complete the transaction nor can you advise the client of the reason why the transaction is delayed. Throughout this period you may not inform the client of the reason for the delay, as this could be treated by the authorities as "tipping off".

Should you report an innocent client who finds out that you reported him to the authorities, it may be difficult to maintain that client’s trust in you to keep his matters confidential. Therefore, before a matter or transaction is reported, careful consideration needs to be given to:

• What constitutes reasonable grounds for knowing or suspecting;
• What you can tell the client without tipping off.

A victim of a crime may have claims against third parties involved in money laundering as a constructive trustee. The law of constructive trusts and the circumstances in which liability can arise are complicated. In addition, the delay in processing a client's instruction may give rise to a claim in negligence. The acts and regulations do not expressly provide for a defence to the potential civil claims, which may arise if a matter is reported to the relevant authority and you are unable to deal with the transaction.

The Mishcon de Reya team deals with all issues of money laundering including:

1. An audit of existing internal procedures.
2. In-house training for all staff and Money Laundering Officers.
3. Development of procedural manuals.
4. Hotline advice to deal with the issues of reporting.
5. Advice and assistance in dealing with potential civil liability.

The Money Laundering team at Mishcon de Reya, including counsel, knows first hand how to help businesses faced with more stringent reporting of their suspicions.

Our team has been involved in three court actions on the reporting requirements of POCA and the use of suspect money for defence costs. These are the only three cases of which we are aware, only one of which has been reported, dealing with the obligations of advisors to make a report: