UK: Money Laundering – Part 2

Last Updated: 9 September 2004
Article by Simon Robert Tissot and Gaby Kaiser

Recently we reported on the implications of the Proceeds of Crime Act 2002 ("POCA") and its impact upon the solicitors’ profession in terms of the solicitor’s duty to report their suspicions of criminal activity to the National Criminal Intelligence Service (NCIS). In this article, we examine the provisions of the Money Laundering Regulations 2003 ("the Regulations") and their application to solicitors. However, when considering the Regulations solicitors cannot forget the wider requirements of POCA.

Introduction

The Regulations came into force on 1 March 2004 and replaced the 1993 and 2001 Regulations. Whereas the previous regime only applied to a few firms, the new Regulations are intended to impose specific requirements on a much wider regulated market including, for the first time, all solicitors (amongst others). The intention of the Regulations is to ensure that proper procedures are in place to effectively identify money laundering activities and to provide a route for their notification to the appropriate authorities. The application of the Regulations is far reaching and it is encumbent upon all solicitors to ensure that they know and understand the requirements and obligations imposed upon them.

The Regulations

The Regulations apply to anyone conducting "relevant business" which is defined in length by the Regulations1, and includes providing legal services in relation to financial or property based transactions. The Regulations do not envisage that all work carried out by a solicitor will be caught. However, it is important that all solicitors and other relevant staff working in a firm understand their obligations so that they do not inadvertently breach the Regulations. For example, work carried out by a litigation solicitor will not in normal circumstances fall within the definition. However, a litigator might be asked to assist on a corporate transaction, perhaps as part of the due diligence process, and, as a consequence, obtain information or become suspicious of all or part of the transaction which may fall foul of the Regulations. The settlement of a claim may lead to a financial transaction which could fall within the Regulations, and one can think of other examples. In those circumstances, the Regulations will apply to the litigation solicitor. If one cannot be certain that the work in a particular area of practice will not be covered by the Regulations, as a matter of good risk management it is sensible to ensure that proper procedures are in place for all solicitors working in that area, and for all business that could be relevant business. The Regulations specifically require any firm carrying out "relevant business" to establish formal procedures to ensure compliance. The key requirements are to:

  • appoint a "nominated officer", usually known as the money laundering reporting officer ("MLRO");
  • establish clear client identification procedures;
  • establish and maintain proper record keeping procedures;
  • establish and maintain internal control and reporting procedures;
  • ensure that all relevant employees are aware of the nature and effect of the Regulations and POCA; and
  • provide training to all relevant employees so they are able to properly identify potential money laundering activities (see Training Requirements below).

The Regulations specify that anyone failing to comply with the requirements is guilty of a criminal offence and may be liable to a prison sentence not exceeding two years and/or a fine (Section 3(2)(a)). It is anticipated that when dealing with offences under the Regulations, the courts will have regard to guidance given by the appropriate supervisory body. In the case of solicitors, the courts are likely to have regard to the guidance promulgated by the Law Society even though it has not yet been approved by the Treasury2. An example of this might be the identity checks needed to identify a client. It would be open to the court to take a stricter view, but it would be tough on the solicitor to say that he had not done enough where he had done all that was expected of him by his regulatory authority. Therefore it is prudent for each firm to consider the nature of its specific business, assess the risk it faces not only in the light of the Regulations and the general law (i.e. POCA), but also in the light of Law Society guidelines, and thereafter ensure that procedures are established which will ensure compliance.

The offences under the Regulations are separate from those identified by POCA but should be considered in conjunction with the POCA offences. We refer to the last edition of the SLB where the principal offences under POCA were discussed.

Failure To Disclose

An important feature of POCA is the requirement to disclose money laundering activity (Section 330 to 332 POCA). Failure constitutes an offence for which the maximum term of imprisonment is five years and/or a fine. What the Regulations require solicitors to do is to put in place, and maintain, internal reporting procedures to ensure compliance with POCA, i.e. so that appropriate disclosures can be made.

The crucial factor for the individual solicitor to consider is that it is not merely actual knowledge or suspicion that is required in relation to the new offence of failing to disclose (i.e., the subjective test which applied to the earlier Regulations). Under the new Regulations, an individual can be guilty of an offence of failing to disclose if he has "reasonable grounds for knowledge or suspicion" i.e. an objective test. Moreover, suspicion creates a low threshold for the prosecution to establish.

The Regulations and POCA require that such knowledge or suspicion (or reasonable grounds) should be reported "as soon as practicable". At present we do not have any guidance on how this term will be interpreted in practice, but it would be prudent to keep a written record of the reasons for any delay, as suggested by the Law Society guidance; for example, if you are seeking legal advice in relation to your obligations.

Further, your MLRO should also be aware that, by virtue of Section 331, if a reasonable suspicion is reported to him (the objective test) and he fails to disclose it to NCIS, the MLRO, as an individual, will have committed an offence under POCA. In addition, a MLRO for a firm outside the regulated market who decides to appoint a MLRO may still be liable under Section 332. In these circumstances the MLRO will commit an offence if he fails to report an offence if he knows or suspects (i.e. the subjective test) that money laundering activities are being pursued.

Has An Offence Been Committed?

First and foremost, practitioners should follow "know your client" guidance throughout the course of the retainer and ensure that the procedures laid down by the Regulations are followed. Secondly, solicitors should consider at the outset who their client is in the specific transaction; this should enable individuals to identify any potential problems which may give rise to suspicion. If this process is undertaken at the start, and a potential problem is identified, the solicitor may simply decide not to act. Alternatively, he can take appropriate precautions. If concerns are raised during the course of a particular transaction, the solicitor must consider whether it is appropriate to notify NCIS. In any event, any suspicion should be notified to the firm’s MLRO. For guidance on reporting to NCIS, we refer to our article in the last issue of SLB.

Any Defence?

The Regulations require firms to provide training to all relevant employees, and a defence is available to employees under Section 330 where they have not received the requisite training and they fail to disclose an offence in circumstances where they have no knowledge or suspicion, even where there might have been reasonable grounds for knowledge or suspicion. Similarly no offence is committed if there is a "reasonable excuse for not reporting". This phrase is not, however, defined by the Regulations and should not be relied upon lightly without guidance from the Court. The defence does not apply to the employer who can be prosecuted for breaching the Regulations for not properly training its employees.

Privilege – The Impact Of The Regulations

The knottiest issue that a solicitor is likely to face under the new regime is; what happens where he is prima facie obliged to report to NCIS but doing so would potentially cause delay and breach professional duties to the client? As practitioners are aware, solicitors have concurrent professional and legal obligations to keep details of their clients’ matters confidential.

The basic rule is that those governed by the Regulations and so obliged to disclose to the authorities, are not required to report money laundering if the information is obtained by a "professional legal advisor" (which includes solicitors and their employees, barristers and in-house lawyers) in privileged circumstances; i.e. in connection with giving or obtaining legal advice, or in connection with actual or contemplated proceedings. However, there is an important exception to this rule; it does not apply if the information is given to the practitioner with the intention of "furthering a criminal purpose". Privilege can never be used to cloak criminality. So the individual solicitor must judge whether the information was supplied as part of a criminal purpose. If it was, he should disclose and will have no defence if he does not. However, if the solicitor genuinely believes that the information coming to him is privileged because the information provided to him is not part of a criminal purpose, but he is mistaken due to the intent of a third party, then he will be considered to have a reasonable excuse of failing to disclose.

The solicitor may still decide to disclose, because a solicitor who knows or suspects that another party is engaged in money laundering (a criminal offence), and makes a disclosure to NCIS is exempted from the usual legal and professional obligations of confidentiality by virtue of sections 337(1) and 338(4) of POCA. Therefore the solicitor can make a disclosure to NCIS without fear of a claim for breach of confidentiality/privilege. The Law Society guidance concludes that, although the privileged material was voluntarily disclosed by the solicitor to NCIS, it retains its privileged status in other circumstances.

What is the position where a solicitor makes a disclosure to NCIS and it later transpires that there were no grounds for his knowledge or suspicion of money laundering, and there was no criminal intent by the client, so the disclosure need not have been made? In our view, this situation is covered by section 337 referred to above. Provided the solicitor’s knowledge or suspicion was genuinely held and defensible or objectively reasonable, the disclosure will be protected. In any event, hopefully, the position will have been weighed carefully by the MLRO so this situation will be rare. In these circumstances, however, it would be prudent to make a note of the grounds for suspicion in case it is later suggested that the suspicion was not reasonable.

Inevitably reporting money laundering to NCIS can cause delays while approval to proceed with a transaction is obtained. There is a fast track procedure but it should not be relied upon. It is more prudent to try to think ahead and avoid being caught in a position of having only just reported a potential transaction and being hindered from proceeding.

Training Requirements

The training requirements with which firms must comply are comprised in Regulation 3 and can be summarised as follows:

  • all "relevant" employees should be made aware of the Regulations.
  • employees should be trained so that they recognise potential money laundering activities and can comply with the Regulations.
  • training should be an on-going process in order that employees are fully aware of developments and updates in the Regulations.

In addition, firms should consider whether employees who do not fit neatly into the category of "relevant" employees should, in any event, receive training, for example secretaries who are involved with obtaining evidence of identification.

Conclusion

Obviously, the Regulations and POCA are of fundamental significance to solicitors and every firm should take immediate steps to ensure compliance with them. If a firm is uncertain whether the Regulations apply to it, the Law Society have recommended that it obtains specific legal advice in relation to its practice.

Firms with significant practices outside the UK may also want to consider whether they should extend their procedures to cover all clients. Although we appreciate that for some firms this will be a particularly onerous task, individual practices must consider what other safeguards are needed if an office outside the UK refers a client, particularly from a less well regulated jurisdiction, to the UK office.

1Regulation 2 (2)(1) 

2The guidance can be found at www.lawsoc.org.uk

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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