UK: Money Laundering Regulations 2003 – Reasonable Grounds for Suspecting

Last Updated: 11 February 2004
Article by David Winch

The UK Proceeds of Crime Act 2002 requires a person in the regulated sector (which from 1 March 2004 includes most lawyers and all accountants and tax advisers) active in the UK to make a report, effectively to his Money Laundering Reporting Officer (MLRO), if, based on information or other matter which comes to him in the course of a business in the regulated sector, "he knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering" (Section 330). This requirement is subject to certain exceptions and to legal professional privilege, as described in the Section.

Where such a report is made as soon as is practicable after the information or other matter is received, then the report is not to be taken to breach any restriction on the disclosure of information (however imposed) and so the person making the report will not be liable to a claim for damages (or disciplinary action) for breach of confidence (Section 337).

Only persons in the regulated sector are required to make reports based merely on "reasonable grounds for knowing or suspecting that another person is engaged in money laundering".

But what are "reasonable grounds" for suspecting money laundering?

In parliament, during the passage of what was then the Proceeds of Crime Bill, the Home Office Minister said that he anticipated that guidance notes about the Act would be issued by the professional bodies for approval by the Treasury; and that these "are expected to include a definition of the term 'reasonable grounds' and examples of situations in which it would be appropriate to report".

Unfortunately no such guidance notes have been approved by H M Treasury since the Bill received the Royal Assent in July 2002, nor are any expected to be approved before 1 March, when the Money Laundering Regulations 2003 come into force. Guidance for banks and similar businesses in the 'old' regulated sector has been issued by the Joint Money Laundering Steering Group but this has not yet been approved by the Treasury. Very recently the Law Society has issued what it calls 'pilot guidance' which is available on the Law Society website at http://www.lawsoc.org.uk/ which should be consulted by solicitors but is not particularly relevant to accountants, estate agents and other newly regulated businesses.

In the meantime what other guidance is available?

Legal precedents

The concept of reasonable grounds for suspicion has been employed many times before in UK criminal law, for example a police officer is required to have "reasonable grounds" before exercising his power to stop and search someone.

The wording is also used elsewhere in the Proceeds of Crime Act. The most useful example perhaps is Section 289 which provides "if a customs officer or constable who is lawfully on any premises has reasonable grounds for suspecting that there is on the premises cash which is recoverable property or is intended by any person for use in unlawful conduct . . . he may search for cash there." The Section also gives similar powers to search a person or any article a person has with him. If the customs officer or constable finds such cash he may seize it under Section 294 and detain it under Section 295. The cash may then be forfeit under Section 298, so these provisions carry a potentially painful bite!

Fortunately for us Section 292 of the Act required the Secretary of State to issue a code of practice in connection with the search power conferred by Section 289. This code of practice has been published on the Home Office website and can be downloaded from http://www.homeoffice.gov.uk/crimpol/oic/proceeds/cop.html.

Code of practice

The code of practice includes a commentary on 'reasonable grounds for suspicion'.

The code of practice says:-

"Whether there are reasonable grounds for suspicion will depend on the circumstances in each case. There must be some objective basis for that suspicion based on facts, information and / or intelligence. . . . Reasonable suspicion can never be supported on the basis of personal factors alone without reliable supporting intelligence or information or some specific behaviour by the person concerned. For example, a person's race, age, appearance, or the fact that the person is known to have a previous conviction, cannot be used alone or in combination with each other as the reason for searching that person. Reasonable suspicion cannot be based on generalisations or stereotypical images of certain groups or categories of people being more likely to be involved in criminal activity. It should normally be linked to accurate and current intelligence or information."

It would appear from this that the use of the term "reasonable grounds" in Section 330 requires that there must be some factual basis, related to an individual, underlying the suspicion that the individual may be engaged in money laundering, before a report may be required.

However in my view the law does not require that the underlying information is necessarily evidence of dishonesty or indicative of any particular criminal offence. It may be something which is simply unusual or unexplained.

Does could mean should?

I would suggest that a single expenditure which cannot be supported by an invoice COULD be sufficient to satisfy the legal test of information underlying a reasonable suspicion of money laundering, so COULD a single occurrence of suspicious behaviour; and a disclosure even on this basis would be likely to merit the protection of Section 337.

But before you contact NCIS, the National Criminal Intelligence Service, for bulk supplies of disclosure forms on which to report every one of your clients, bear with me a while longer.

Whilst a single missing expenditure invoice COULD be sufficient ground for a reasonable suspicion, does it follow that an accountant must file a report with NCIS in every case of a missing piece of paper; or must a lawyer report every client who exhibits suspicious behaviour? In other words, if this COULD be sufficient does it follow that it SHOULD be sufficient; and that Section 330 REQUIRES that a report be made in every case?

Hopefully the guidance from the accountancy bodies will help in this area, when it arrives.

Since we do not yet have that guidance, I will offer my own thoughts on the subject.

UK law now defines money laundering very broadly. In effect it includes possession or handling or becoming concerned in an arrangement involving any proceeds of any crime. So a shoplifter taking a pair of jeans from a department store is guilty of theft and money laundering, because he has possession of the proceeds of a crime (the jeans which he stole). So, in the UK at least, money laundering need not involve either money or laundering!

Value in the context of 'reasonable grounds'

Although there is no de minimis rule in Part 7 of the Act or the Regulations and a report is required where reasonable grounds for suspicion exist, however trivial the amount which may have been laundered, there is no bar to consideration of the amount involved in the context of deciding whether or not there are reasonable grounds for suspicion.

An example may clarify my point. Suppose there is a business expense claimed for a £10 taxi fare, but no invoice or receipt can be produced in response to an enquiry by the accountant. It may be that there was a bona fide business expense of £10 on the taxi fare, or it may be that the expense was a personal one which should not have been claimed against the business, or it may be that the expense did not exist at all and the £10 was stolen from the business or drawn by the proprietor. I would take the view that it is not unusual for an invoice or receipt to be unavailable for a £10 taxi fare. So I would not regard this as a sufficient basis for a reasonable suspicion of money laundering.

Suppose however that there was a business expense claimed for a £10,000 repair of a business property, but no invoice or receipt could be produced in response to an enquiry by the accountant. It may be that there was a bona fide business expense of £10,000 on the business property repair, or it may be that the expense was a personal one, say on the proprietor's home which should not have been claimed against the business, or it may be that the expense did not exist at all and the £10,000 was stolen from the business or drawn by the proprietor. I would take the view that it is unusual for an invoice or receipt to be unavailable for a £10,000 property repair. So I would regard this as a sufficient basis for a reasonable suspicion of money laundering if the query could not be resolved to my satisfaction. In these circumstances I would expect to make a report to NCIS under the new law (but I would also need to take into account any other relevant information in my possession and whether the client proposed to change the treatment of the £10,000 following my query, before making a final decision).

Applying skills, knowledge and experience

I take the view that the new law relating to "reasonable grounds" for suspicion applies to me because I am in business in the regulated sector and that the lawmakers would have had in mind that, as such, I would be expected to have certain skills and experience. To my mind, it follows that I should apply those skills and my experience in deciding whether or not I have reasonable grounds for suspicion of money laundering in any particular case. In other words, I do not believe the law requires me to make a report to NCIS automatically whenever a particular piece of paper cannot be produced by a client in response to a query from me or whenever my client exhibits behaviour which could be regarded as suspicious.

A lawyer or accountant in practice will often have had a relationship with his client going back over a number of years. He may have an in-depth knowledge and understanding of the client's personal circumstances and his business and financial affairs. This knowledge will assist him to distinguish the routine from the exceptional and the unremarkable from the suspicious. This knowledge should be documented on the client's file, particularly when it becomes a factor in the professional's decision to make a report to NCIS and, perhaps even more importantly from the professional's point of view, when a decision is made NOT to make a report (since there are penalties for failing to report in appropriate circumstances).

In a professional office the person dealing with a client initially and in greatest detail is unlikely to be an experienced and qualified professional. But they are required to report to the MLRO if they have concerns. Almost any customer or client, and almost any transaction, might involve money laundering. So how can less experienced staff be helped to focus on the ones which carry the greatest risk of actually involving money laundering, or for which there are reasonable grounds for suspicion? There is no simple rule which can be used to identify suspicious circumstances, so what guidelines can be produced to assist less experienced staff?

Guidelines for staff

I would suggest that staff be required submit a report to the MLRO immediately in three sets of circumstances.

  1. Where there is evidence which is suggestive of criminal behaviour of any kind which may produce a financial benefit for the perpetrator or anyone else, including:
  • theft of money or goods,
  • tax evasion (whether of direct or indirect taxes or duties),
  • fraud (including social security benefit fraud),
  • falsification of documents or records of any kind,
  • forgery or counterfeiting,
  • handling of stolen goods or funds,
  • blackmail or extortion,
  • prostitution, and
  • trafficking of drugs or people.

Such offences usually, but not always, involve dishonesty or deception. If the customer or client is involved in any such criminal offence then, because of its wide definition, he is also likely to be engaged in money laundering. It follows that a report will be required (unless one of the exceptions applies).

  1. Where there is evidence of any terrorist connection.
  1. Where any two or more of the following risk factors are present:-
  • A new customer (or client)
  • A customer which is unusual for the firm because of the customer's location, type or size or because of the nature of the work or advice which the customer requires
  • An unusual requirement for use of the firm's client account or money transmission facilities
  • Concerns about the honesty or integrity of the customer
  • Poor business records or lack of supporting documents
  • Lack of appropriate internal accounting controls in the customer's business
  • A cash based business
  • An unusual and substantial payment in cash
  • Movement of funds overseas or into or out of a foreign currency
  • A transaction without obvious legitimate purpose
  • An absence of an obvious legitimate source of the funds employed in the business or in a transaction
  • The reversal of an earlier transaction
  • A previous transaction which has been, or should have been, the subject of a report (or would have been had the new law applied previously).

Staff members should include all the relevant information available to them in their report to the MLRO. Where any work or a transaction is in progress or imminent, full details of this must be included in the report.

Exceptionally, should a staff member consider that a report to the MLRO is not required in the above circumstances they must make a full file note of the circumstances and their reasons for not submitting a report to the MLRO.

Action by the MLRO

When he receives information or a report the MLRO should review it, together with any other relevant information in the firm's possession and decide whether a report to NCIS is required. If a report to NCIS is required it should be made on the appropriate NCIS form as soon as is practicable after the information comes to him (normally by fax).

When deciding whether a report is required an MLRO in the regulated sector should have regard to Section 331. An MLRO outside the regulated sector should have regard to Section 332. These sections impose criminal penalties on an MLRO who fails to act appropriately on receipt of a report or information. The maximum penalty is 5 years imprisonment and a fine.

The MLRO will not be excused from making a report to NCIS simply because he knows or suspects that a similar report has already been filed by another person or firm.

Once he has decided that a report is necessary the MLRO must ensure that nothing is done by anyone in the firm which might constitute a prohibited act without consent from NCIS. A prohibited act means an offence against any of Sections 327 - 329.

It will normally be appropriate to suspend any work or transaction currently underway or imminent, pending consent from NCIS to continue. A response from NCIS should normally be received within 7 working days of the submission of a report – more quickly in urgent cases.

The MLRO should also ensure that there is no tipping off which would contravene Section 333 or destruction of documents which would contravene Section 342. The MLRO would be well advised to be familiar with the guidance issued by NCIS at www.ncis.gov.uk/legaldisclosures.asp .

It goes without saying that the MLRO should prepare and preserve full records of information received by him, communications he may have with NCIS and with staff and the reasoning behind each of his decisions.

Case study

The following case study aims to illustrate the operation of the procedures under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 when they come into force.

All persons mentioned in this case study are fictional and any similarities to any real persons are purely co-incidental.

Penelope Hassett is an antiques dealer in Ambridge. She has been in business many years and is a well respected customer at the Ambridge Branch of Borsetshire Bank, where she has had her business bank accounts for the past 5 years.

On 10 June 2004 she visits the bank with £85,000 in cash which she wishes the bank to credit to an existing account in her name at a Channel Islands branch of the bank. Penny volunteers to the bank cashier that she has received the money from the estate of a friend of hers, who died earlier in the year.

The cashier is aware that the account at the Channel Islands branch now offers interest of only 0.1% per annum and asks Penny if she would be interested in a High Interest Savings Account at the Ambridge Branch, which would give a better return, or alternatively if she would like an appointment with one of Borsetshire Bank’s investment advisers. Penny responds that, for the present, she would rather the money were simply credited to her existing account at the Channel Islands Branch. The cashier accepts the cash on this basis.

Immediately after Penny leaves the bank the cashier files a report with the bank’s MLRO. The cashier notes in his report that: Ms Hassett is a long established and well respected customer at the branch; £85,000 is an unusually large cash deposit for Ms Hassett; it seems implausible that a legacy of this size from an estate would be received in cash; the transaction involves sending monies offshore; and the investment of the funds at such a low interest rate appears uneconomic.

The bank’s MLRO considers the cashier’s report and decides that he should report the transaction to NCIS and seek consent to proceed with it. He faxes his report to NCIS later the same day. Within a couple of hours NCIS fax back to the MLRO consenting to the transfer of the funds. The MLRO then gives his consent to the transfer to the cashier. The funds are then transferred to the Channel Islands Branch in accordance with Ms Hassett’s instructions.

Ms Hassett remains unaware that a report of the transaction has been made to the authorities.

Ms Hassett has no known or suspected terrorist connections.

NCIS forward a digest of the information contained in the bank MLRO’s report to Borsetshire Constabulary Fraud Squad and to the Inland Revenue.

The authorities obtain information to the effect that Ms Hassett’s account at the Channel Islands Branch of Borsetshire Bank was opened in 2001. There have been several lump sum deposits since then and the balance in the account now exceeds £½ million.

The Fraud Squad make local enquiries which indicate that Ms Hassett has no known or suspected criminal activities or connections. They decide to take no further action on the report.

Examination of Ms Hassett’s tax returns by the Inland Revenue reveals no mention of any interest arising on an overseas bank account. Ms Hassett’s level of drawings from her business as shown on her tax returns do not appear to support the size of deposits made in the Channel Islands account.

The Inland Revenue Special Compliance Office open an enquiry into Ms Hassett’s tax returns and invite her, and her professional advisers, to an interview under the Hansard procedure. In accordance with their normal practice, the Special Compliance Office give no clue that they have information concerning the Channel Islands bank account. Unfortunately, when asked for details of her income and assets during her initial interview, Ms Hassett fails to mention the Channel Islands account, which she has also kept secret from her accountant.

Ultimately after a full investigation and report by specialist tax accountants instructed by Ms Hassett, incorporating various admissions by her, including the existence of the Channel Islands account, she agrees in October 2005 to make payment to the Inland Revenue in respect of tax, interest and penalties on estimated undeclared business takings of nearly £1 million over the entire period for which she has been in business. The total payable to the Inland Revenue is just slightly less than the total balance standing to the credit of her Channel Islands account. The remainder is swallowed up by professional fees. The Inland Revenue decide to accept this payment and not to instigate a criminal prosecution of Ms Hassett for tax evasion.

Ms Hassett never finds out what triggered the Inland Revenue investigation, but she suspects (incorrectly) that she was ‘shopped’ by her ex-husband.

************

David Winch, B.Com., F. C. A. is a forensic accountant specialising in white collar crime including theft, fraud, false accounting, evasion of taxes and duties, drug trafficking, Companies Act offences, money laundering, and associated confiscation, forfeiture and disqualification proceedings.

David is always willing to review a case and give informal initial assistance on a no charge and no obligation basis without legal responsibility.

David is a director of Accounting Evidence Ltd and can be contacted at:

Accounting Evidence Ltd
Peter House
Oxford Street
Manchester
M1 5AN

Copyright

This document is copyright. However the copyright holder gives permission for this document to be freely copied or distributed with full acknowledgement of its source provided that either the document is copied and distributed in its entirety or that a part or parts not exceeding 200 words is copied or distributed.

Disclaimer

This document has been issued by David R Winch, Chartered Accountants, a UK firm, or a company under its control (which include Accounting Evidence Limited). The information in this document is of a general nature and is no substitute for legal or professional advice specific to your circumstances or query. No responsibility can be accepted for any losses (of any nature) arising from reliance on statements, opinions or advice contained in this document.

© Accounting Evidence Ltd 2004

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