UK: Serious Organised Crime And Police Act 2005 Amendments To The Proceeds Of Crime Act 2002

Buried in the 179 sections and 17 schedules of the Serious Organised Crime and Police Act 2005 (SOCA) there are some important changes to the money laundering offences contained in Part 7 of the Proceeds of Crime Act 2002 (PoCA). Among other things, SOCA establishes the Serious Organised Crime Agency, popularly seen as a UK version of the FBI in the US. This new agency, due to become operational in April 2006, will take over the functions of the National Criminal Intelligence Service (NCIS) and the National Crime Squad which both have a particular role in the Government's anti-money laundering drive. And in sections 102 to 109, SOCA makes four changes to the PoCA money laundering offences which will be of interest to lawyers who have now been trying to make sense of the legislation for over a year:

• conduct overseas may no longer count as "criminal conduct" if it is not a criminal offence in the jurisdiction in which it occurs.
• there will no longer be an obligation to report where the information you have does not disclose the identity of the potential offender or the whereabouts of the criminal property.
• a disclosure by a lawyer to the firm's MLRO will not oblige the MLRO to report the matter on to NCIS if the lawyer was just seeking advice.
• the existing provision allowing the Government to prescribe the form and manner of disclosures is given added force by making it a criminal offence to disclose a matter in any other way.

Since PoCA came into force money laundering has been about more than drugs and terrorism. Now a money laundering offence may be based on any crime committed anywhere in the world. This results from two key definitions in s.340, PoCA:

• "criminal conduct" is conduct which constitutes an offence in any part of the UK, or which would do so if it occurred in the UK.
• "criminal property" is property which constitutes a person's benefit from criminal conduct or which, directly or indirectly, in whole or in part, represents such a benefit, and the alleged offender knows or suspects that it does so.

So if a UK lawyer is involved in a transaction which he knows or suspects involves, for example, the proceeds of a bank robbery in Rome, he will risk committing an offence under both sections 328 and 330 of PoCA unless a disclosure is made to his firm's MLRO who will then report the matter on to NCIS. Bank robbery is a crime in both the UK and Italy. But many other acts are crimes in the UK which may not be classed as crimes in other jurisdictions. The hypothetical Spanish bullfighter (who makes regular appearances in articles such as this) can legally live off his fees from fighting bulls in Seville, but will find that in the UK they amount to criminal property, being a benefit from his bull fighting which would be an offence if carried out in Sevenoaks.

A less frivolous example might involve a UK company buying a power station in the Ukraine. The power station pollutes the local environment in a way which would be an offence if it happened in the UK, but which is not in the Ukraine. The plant operates legally in its own jurisdiction but all revenue which can be said to be a direct or indirect benefit from the pollution will be criminal property under PoCA and so is likely to give rise to a reporting obligation in the UK. In practice the UK law enforcement authorities have little or no interest in such matters but the fact remains that the failure to make a report will itself be a criminal offence punishable by an unlimited fine and/or up to 14 years in prison.

NCIS made an attempt to ameliorate the burden of reporting such matters by citing overseas offences as an example where the disclosure obligation might be satisfied by using their short but aptly named Limited Intelligence Value Report form. Now the legislature has tried a different solution by providing an additional defence to all three of the money laundering offences in ss.327-329, PoCA and to the failure to disclose offences in ss.330-332.

There are three requirements for this new defence (s.102, SOCA):

• you must know or believe on reasonable grounds that the relevant criminal conduct occurred in a particular country or territory outside the UK;
• that conduct was not, at the time it occurred, unlawful under the criminal law then applying in that place; and
• the conduct is not of a description prescribed by statutory instrument.

That last condition is designed to allow the Government to take out of this defence certain conduct which, even if it is not a crime under local law, is nonetheless of interest to the UK authorities. The NCIS short form report referred to above carried a similar exception and quoted as examples serious tax evasion and other crimes such as terrorism, offences relating to drugs and paedophilia. In Standing Committee debates on the Bill the Home Office minister mentioned also corruption offences, drug cultivation and trafficking of people. Because of the need for secondary legislation to finalise this list, it seems unlikely that these amendments will take effect before Autumn 2005 when Parliament returns from its summer recess.

Whether you have knowledge or a reasonable belief that the conduct occurred in a particular country outside the UK should not be difficult to decide in most cases, though circumstances can be imagined where the complexity and international nature of a person's activities may leave the point unclear. But the real difficulty comes with the second condition where there is no room for doubt on the question of criminality, or lack of it, under local law. A reasonable belief that bull fighting in Spain or pollution in the Ukraine is legal will not be enough. Certainty is required which, in a practical context, may necessitate taking local legal advice to establish whether the conduct was a crime in that jurisdiction at the time it occurred. This purely objective test is curious given that elsewhere in PoCA there are subjective tests – for example, the knowledge or suspicion that arrangements facilitate the acquisition etc of criminal property in s.328(1), and knowing or suspecting that criminal property is a benefit from criminal conduct in s.340(3)(b).

The possibility of a report to NCIS in the case of overseas conduct may seem a bad enough example of red tape and bureaucracy gone mad; now someone will have to pay for foreign legal advice to establish whether a report can be dispensed with. In the circumstances, it may be easier to ignore the potential defence and to carry on reporting such matters to NCIS.

In the many seminars and conferences on money laundering which NCIS attend they are always keen to stress that reports sent to them are of little practical use if they do not name the alleged offender or give details of the whereabouts of the supposed criminal property. That may well be the case, but it does not obviate the need to report partial information if a criminal offence is to be avoided. But now the three failure to disclose offences in ss.330-332, PoCA which apply to all lawyers in the regulated sector and to nominated officers both within and outside the regulated sector, will contain an extra condition which has to be satisfied before the offence can be committed.

The effect of s.104, SOCPA in amending those three PoCA sections is that there will now be no requirement to report to NCIS knowledge or suspicion of another person committing one of the money laundering offences in ss.327-329, PoCA unless either:

• you can identify the alleged offender or the whereabouts of the criminal property; or
• you believe (or it is reasonable to expect you to believe) that the information on which your knowledge or suspicion is based will or may assist in identifying the alleged offender or the whereabouts of the criminal property.

So if a lawyer has knowledge or suspicion of criminal property derived from criminal conduct, but cannot identify the alleged offender and does not know where the proceeds of the crime are to be found, and the information he has will not help anyone else to answer those questions, there is no need to report.

Note that the first condition has two limbs, both of which must be satisfied if you are to escape the obligation to disclose: you must be unable to identify both the offender and the property's whereabouts. If you can identify one only, the condition is satisfied and you must report. The second condition is an alternative to the first and begs the question as to what it is reasonable for a layman to assume the law enforcement authorities may or may not be able to do with otherwise innocuous information. With sophisticated information matching software available to the police, it may be safer to believe that any scrap of information will be of some use to them.

The opportunity has also been taken to amend ss.330-332 to make it clear that the required disclosure in each case is not just of the information behind one's knowledge or suspicion of a money laundering offence, but also of the identity of the alleged offender and of the whereabouts of the criminal property to the extent either is known to you.

These amendments are likely to take effect before Parliament rises for the summer recess on 21 July, and may come in as early as 1 July 2005.

S.330, PoCA makes it an offence for those working in the regulated sector (that is, most lawyers) if they do not make a "required disclosure" to their nominated officer (or direct to NCIS) when they know or suspect the commission of a money laundering offence, or have reasonable grounds for such knowledge or suspicion. A disclosure to a nominated officer is one made to the person nominated by an employer to receive such disclosures, usually called the Money Laundering Reporting Officer or MLRO. If that disclosure to the MLRO means that he then has knowledge or suspicion of a money laundering offence (or it gives him reasonable grounds for such knowledge or suspicion), then s.331 requires him to report the disclosure on to NCIS.

A lawyer does not commit an offence by failing to disclose knowledge or suspicion where the relevant information came to him in privileged circumstances (defined in s.330(10), PoCA). But if the lawyer nonetheless passes the information to his MLRO, perhaps when seeking his advice, the latter does not receive it in privileged circumstances and will be bound to disclose it to NCIS nonetheless, which may well be a breach of privilege or of the client's right to confidentiality. S.106, SOCPA therefore adds a new s.330(9A) which makes it clear that if a lawyer discloses matters to an MLRO for the purpose of obtaining advice about making a disclosure, and does not intend that to be a formal disclosure, it will not count as a disclosure and so will not trigger the need for a report to be made by the MLRO to NCIS. It will be for the MLRO to remind the lawyer in each case that such an informal chat does not discharge his colleague's duty to make a formal disclosure as and when the requisite knowledge or suspicion arises.

This amendment is likely to become effective no later than 21 July and may also come as early as 1 July 2005.

S.339, PoCA allows the Government to prescribe the form and manner in which disclosures are to be made. To date, NCIS has produced disclosure forms which it strongly prefers are used but it continues to accept disclosures in any written format. (All disclosures are entered on to the NCIS computer and they say that failure to use their forms lengthens the time it takes to enter the information and so creates delay.) The latest news from NCIS is that they hope to have a mandatory form by April 2006 when it will also become obligatory for the form to be filed electronically (rather than by fax or post). The new forms are likely to follow closely the existing voluntary forms, though it is to be hoped that they will be more user-friendly in their electronic format. A pilot is promised before the year end.

Making a disclosure without using this prescribed form and in the prescribed manner will now be an additional criminal offence, punishable by a fine not exceeding level 5 on the standard scale, unless a reasonable excuse for the failure can be shown.

Although the Home Office has promised to keep Part 7 of PoCA under review, it is to be regretted that the vigorous lobbying of many lawyers to restrict the reporting requirement to serious crimes, or to introduce a de minimis threshold for criminal property, has not been listened to. The only concession on the latter point has been to exempt banks from the three money laundering offences in ss.327-329 when operating an account where the criminal property is less than £250, or such higher sum as may be specified by the law enforcement authorities in a particular case.