Money Laundering: how to be compliant and avoid civil liability

Financial institutions and intermediaries which handle or receive the proceeds of criminal activity or who give assistance in the transfer, removal or realisation of hot money are vulnerable to civil liability as well as to criminal sanctions under money laundering legislation.

Speaking at A&L Goodbody's conference entitled "Money Laundering - the Irish Perspective", Paul Carroll warned delegates that while the main focus of money laundering has been on criminal liability, "deep pocket" financial institutions are potential targets for civil liability.

A&L Goodbody Solicitors has established a Money Laundering Unit to advise institutions and professional advisors, among others, on compliance and on criminal and civil liability issues.

Money laundering legislation covers the proceeds of all criminal activity, including drug trafficking, theft, fraud, robbery and tax evasion offences, among others. Money launderers need to clean their "hot money" and reputable financial institutions and advisors need to protect themselves from money launderers who increasingly seek to draw on their services to assist with their laundering operations.

The money laundering offence in Irish law is very broad and potentially impacts on institutions and advisors. A person shall be guilty of money laundering if he or she knows or believes that the property or funds represent the proceeds of crime. "Believing" includes thinking that the property or funds probably represent such criminal proceeds.

This has very serious implications for financial institutions and intermediaries. A money laundering offence is also committed where a person handles the proceeds of criminal activity. A "handler" is deemed to have the necessary belief if he or she merely thinks that the property is probably tainted.

The legislation established a compliance programme which applies to "designated bodies". These include most of those in the financial services sector including banks, building societies, stockbrokers, insurance companies, among others.

There are four obligations imposed on these designated bodies:

1. Knowing the customer - designated bodies must take reasonable measures to establish the identity of its customer.

2. Maintenance of records - records must be kept for 5 years after the transaction has been executed or after the relationship with the customer has ended.

3. Reporting suspicious transactions - designated bodies, including employees, are required to report to the police where they suspect that a money laundering offence has been or is being committed. It is not acceptable to turn a "blind-eye" to suspicious activities. Confidentiality rules are disapplied in such cases and disclosure to the police will not give rise to legal liability. It is also an offence to alert a customer to the fact that a report has been made to the police. This is known as the tipping-off offence.

4. Education and training of staff - designated bodies are required to put in place procedures to prevent and detect money laundering.

Failure to comply with these obligations is a criminal offence which carries a prison sentence and or/fines.

Institutions are also at risk under the civil law. This is reflected by trends in the courts in other jurisdictions, including the UK, where institutions and advisors have been targets for civil liability, Mr. Carroll said. Liability under the civil law will give rise to an obligation to provide financial compensation to the victims of crime.

"For example, in one case a firm of accountants were held personally liable for assisting with a money laundering scheme. In another case a London law firm became aware that a liquidator of a US insurance company had claims for fraud against one of its clients. The law firm sought directions from the High Court in England in relation to its position. The Court held that, with the knowledge it had, if the firm had transferred their client?s funds out of their control they might be potentially liable under the civil law for assisting with the movement of the proceeds of fraud". Mr. Carroll said these potential civil liabilities should be factored into in-house compliance programmes.

In conclusion, Mr. Carroll said: "The Irish courts have not yet grappled with the issue of civil liability in the context of money laundering. However, it would appear that this type of liability is in line with the will of the legislature in its approach to countering money laundering in placing responsibilities on intermediaries."

This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.