UK: Bankers: Money-Laundering, Reporting Obligations And The New Criminal Finances Bill

Last Updated: 3 January 2017
Article by Rodney Dukes
Most Read Contributor in UK, January 2017

Introduction

A terrorist attack on the UK is a case of 'when, not if', the head of the Metropolitan Police said earlier this year. In the last 12 months, the Charlie Hebdo massacre in Paris, the bombings in Brussels and the lorry ploughing into crowds in Nice have created a genuine fear that the UK will be the next target. The nature of terrorist financing varies considerably: the so-called Islamic State of Iraq and the Levant relies on funds generated within the territory it controls (for example from the sale of oil and extortion from individuals and businesses) whereas the financing of individual terrorists working alone is more difficult to trace, as they often rely simply on individual salaries or welfare payments. Yet whatever their differences, any serious terrorist enterprise will use the banking system for its own ends.

Central to combatting the financing of terrorism is the promotion of greater transparency across the financial sector, with banks now facing a set of stringent, complex obligations to cast light on suspicious transactions. The latest proposed addition to the Government's armoury is the Criminal Finances Bill, introduced to 'tackle money laundering and corruption, recover the proceeds of crime and counter terrorist financing'. This is currently making its way through Parliament. It is likely to come into force in mid-2017.

This article focuses on money-laundering offences, which are the most significant element of the Proceeds of Crime Act 2002 (POCA) for those working in the financial sector.

Client confidentiality?

The banker-customer relationship is of a confidential nature, and the banker is under a duty of secrecy (Tournier v National Provincial and Union Bank of England [1924] 1 KB 461). This duty applies not only to information obtained from an account, but from any source arising out of the relationship between the bank and its customer including assessments and information generated by the bank. It does not terminate upon the closing of the account.

Money-laundering: the current regime

The principal offences

These are set out in Part 7 of POCA.

Money laundering is essentially the process by which proceeds of crime are converted into assets which appear to have a legitimate origin. The substantive offences are set out in ss 327 to 329 of POCA. These are commonly known as the concealing offence, the arranging offence and the acquisition, use and possession offence. Penalties imposed may amount to a maximum of 14 years' imprisonment; an unlimited fine; or both.

The reporting obligation

The failure to disclose offence, also known as the reporting obligation, has caused the most anxiety among those active in the financial sector (s 330). In a banking context, and in summary, a person commits an offence if he knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaging in money laundering and fails to make a disclosure as soon as practicable to the bank's nominated officer (the money laundering reporting officer) who in turn must make a disclosure, if suspicious, to the National Crime Agency (NCA). This is an objective test. A person who ought to have been, but fails to be, suspicious is caught within the section.

To be suspicious means there is a 'possibility, which is more than fanciful, that the relevant facts exist' (R v Da Silva [2006] EWCA Crim 1654). The courts recognise that this requires more than an unusual pattern of behaviour and is more than a feeling of unease or a gut feeling.

Suspicious Activity Reports (SARs)

As noted above, it is for the bank's nominated officer to decide whether or not to make a SAR to the NCA. At first glance, the making of the SAR looks like a breach of client confidentiality. However, the Tournier judgment states exceptions where disclosure is permissible, including under compulsion of law. Furthermore, banks can generally protect their position by ensuring that express confidentiality provisions (often included in account terms and conditions) are subject to permitted exceptions.

Having made a report, the bank must wait to receive an 'appropriate consent' before dealing with the property i.e. going ahead with the relevant transaction.

If the NCA does not refuse consent within 7 days of receiving the SAR, then the transaction can continue. If, however, a refusal is sent by the NCA within 7 days, the NCA then has a further 31 days to decide whether or not to commence an investigation – a moratorium period. During this time, the bank cannot proceed. This can cause difficulties for a bank balancing a customer's expectations and also seeking to avoid 'tipping off'.

'Tipping off'

One of the biggest problems a bank faces when making a report to the NCA is to avoid 'tipping off' a customer regarding a disclosure or a current/potential investigation (s 333 POCA). The customer will ask why his payment instructions aren't being complied with. The bank cannot answer frankly.

An irate customer might apply for an injunction to compel a bank to make a transfer in accordance with account terms and conditions (see K Ltd v Nat West Bank Plc (Revenue and Customs Prosecution Office and Serious Organised Crime Agency intervening [2006] EWCA Civ 1039).

In Tayeb v HSBC Bank & Another [2004] EWHC 1529 (Comm), a customer successfully sued a bank for reversing a CHAPS transfer.

More recently, in Shah v HSBC [2012] EWHC 1283 (QB), the bank was held not to be under an obligation to provide information to its customers explaining the reasons for its inability to act. However, such behaviour does not strengthen customer relations.

'Tipping off': bank protections

Banks should include an express power to refuse to comply with a customer's instructions when criminal sanctions might apply; and to exclude liability for any loss flowing from such refusal (although this is subject to the reasonableness test).

Increasingly, banks are also using their terms and conditions and express contractual powers to close down the accounts of those suspected of money laundering.

In relation to procedural protections, there is some guidance from case law. In Governor and Company of the Bank of Scotland v A Limited and Others [2001] All ER (D) 81 (Jan), A Limited held accounts at the Bank of Scotland. The bank discovered that the company was being investigated by the authorities. It was concerned that if it paid monies out of those accounts, it would become liable as a constructive trustee. On the other hand, a refusal to honour cheques might invite reprisals from A Limited, and the bank would not be able to justify itself for fear of 'tipping off' the company. The bank went to court and an injunction was granted, freezing the company's accounts at the bank.

The Court of Appeal submitted that this was the wrong course of action. The correct procedure was set out in C v S and Others [1997] 1 WLR 1551. The bank should have discussed the matter with the SFO (NCA predecessor) to agree on an explanation to be given to the company. If the bank and SFO had failed to agree, the bank could have made a 'without notice' application to court for directions, the defendant in that action being the SFO (not the account holder). A judge would then have made an interim declaration defining what could be disclosed. The Criminal Justice Act 1988 was in force when this case was tried, but the principles applied by the court are still relevant.

The Criminal Finances Bill and SARs

The Criminal Finances Bill contains:

  • new criminal offences relating to corporate failure to prevent the facilitation of tax evasion
  • a new 'unexplained wealth orders' regime
  • novel measures to facilitate information-sharing between regulated entities
  • powers to extend the moratorium period to investigate SARs
  • extension of the use of disclosure orders.

The last two points will bring significant changes to the money-laundering regime. Firstly, the maximum permissible moratorium period will now be 217 rather than 31 days. Successive 31 -day extensions may be requested. Each extension will require a fresh application to court; and the court's approval. Nevertheless, a much longer permitted moratorium period may mean as much as seven months of inactivity, delay and silence between bank and customer. This will surely be untenable for most customers.

Secondly, the NCA will be empowered to serve Further Information Notices to demand extra information from financial services businesses, as part of an investigation. The requests may be made to persons in the regulated sector following a SAR; or if the NCA is assisting another investigating overseas agency. This will present another compliance burden for banks.

Conclusion

As the threat of terrorism has intensified, so too has the government's push to peel back the cloak of secrecy under which terrorists have previously been able to fund their attacks.

Efforts to combat terrorist financing can only be deemed a positive step forward. However, banks as intermediaries can expect an increasing regulatory focus on money-laundering offences, reporting obligations and attendant compliance issues.

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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