You are here:
  1. Home
  2. Advice
  3. Practice notes
  4. Anti-money laundering
  5. Chapter 10: Civil liability

Chapter 10: Civil liability

22 October 2013

Contents

10.1 General comments

The Proceeds of Crime Act 2002 aims to deprive wrongdoers of the benefits of crime, not compensate the victims. The civil law provides an opportunity for victims to take action against wrongdoers and those who have assisted them, through a claim for constructive trusteeship. Victims often target the professional adviser in civil claims because they are more likely to be able to pay compensation, often by reason of their professional indemnity cover.

If you believe that you may have acted as a constructive trustee, you should seek legal advice.

10.2 Constructive trusteeship

Constructive trusteeship arises as a result of your interference with trust property or involvement in a breach of fiduciary duty. These are traditionally described respectively as knowing receipt and knowing assistance.

Your liability in either case is personal, an equitable liability to account, not proprietary. A constructive trustee has to restore the value of the property they have received or compensate the claimant for the loss resulting from the assistance with a breach of trust or fiduciary duty. See Lord Millett in Dubai Aluminium Co Ltd v Salaam [2002] 3 WLR 1913,1933.

The state of your knowledge is key to this liability. Records of CDD measures undertaken and disclosures or your notes provide evidence of your knowledge and intentions.

10.3 Knowing receipt

Liability for knowing receipt will exist where a person receives property in circumstances where the property is subject to a trust or fiduciary duty and contrary to that trust applies the property for their use and benefit. Considering each element in turn:

10.3.1 Receipt

  • You must have received the property in which the claimant has an equitable proprietary interest.
  • The property must be received:
    • in breach of trust
    • in breach of a fiduciary duty, or
    • legitimately, but then misapplied
     

10.3.2 For your use and benefit

When you receive money, eg as an agent, or, as in the case of a solicitor's client account, as a trustee of a bare trust, then you are not liable for knowing receipt as it is not received for your use or benefit. You may however still be liable for knowing assistance.

Receiving funds that you apply in satisfaction of your fees will however be beneficial receipt and could amount to knowing receipt.

10.3.3 You must be at fault

What constitutes fault here is the subject of some debate. The Court of Appeal in BCCI v Akinele [2001] Ch.437 held that the test is whether you acted unconscionably. The test is a subjective one which includes actual knowledge and wilful blindness. The factors the court identified were that:

1) You need not have acted dishonestly. It is enough to know a fiduciary or trust duty has been breached.

2) Your knowledge of funds' provenance should be such that it was unconscionable for you to retain any benefit.

It's unclear whether a reckless failure to make enquiries a reasonable person would have made would be sufficient to establish liability. In Dubai Aluminium Co Ltd v Salaam [2002] 3 WLR 1913 1933 Lord Millett described knowing receipt as dishonest assistance. However, that may well have been specific to the particular facts he was considering.

10.4 Knowing assistance

If you help in a breach of fiduciary or trust duties then you are personally liable for the damage and loss caused. See Twinsectra v Yardley [2002] WLR 802.

The requirements to establish liability of this kind are:

10.4.1 Assistance in a breach of trust or fiduciary duty

The breach need not have been fraudulent, (see Royal Brunei Airlines v Tan [1995] 2 AC 378), and you do not need to know the full details of the trust arrangements you help to breach, nor the obligations incumbent on a trustee/fiduciary.

You assist if you either:

  • know that the person you are assisting is not entitled to do the things that they are doing
  • have sufficient ground for suspicion of this

10.4.2 You must be at fault

There must be dishonesty, not just knowledge. The test for dishonesty is objective. The Privy Council in Eurotrust v Barlow Clowes [2006]1 All ER stated that the test is whether your conduct is dishonest by the standards of reasonable and honest people, taking into account your specific characteristics and context, ie your intelligence, knowledge at the relevant time, and your experience.

Conscious impropriety is not required; it is enough to have shown wilful blindness by deliberately failing to make the enquiries that a reasonable and honest person would make.

10.5 Making a disclosure to the NCA

10.5.1 Risk of defensive disclosure to the NCA

Where you suspect or know your clients are involving you in circumstances that could amount to one of the principal money laundering offences, you must disclose your suspicions to the NCA, subject to the constraints of LPP, and obtain their permission before allowing the transaction to proceed.

Consent from the NCA only protects you from falling foul of the anti-money laundering regime. It will not defend you from civil liability. In fact, obtaining consent may create the very evidence on which a claimant can rely to found a civil liability.

It is therefore vital that you only disclose to the NCA those situations fulfilling the statutory tests in Part 7 of POCA; knowledge or suspicion of money laundering, or reasonable grounds to suspect money laundering.

10.5.2 While awaiting consent from the NCA

Your position can be difficult. While the client will be expecting you to implement their instructions, you may be unable to do so, or give explanations, as you may risk a tipping off offence.

The client may seek a court order for the return of the funds on the basis that you are breaching their retainer.

Case law provides no direct authority on the point, but a recent ruling on the obligations of banks is helpful in suggesting the courts' likely view of the obligations imposed on solicitors. In K v NatWest the Court of Appeal ruled that a bank's contract with the customer was suspended while the moratorium period was in place, so the customer had no right to an injunction for return of monies. The court also said that as a matter of discretion, the court would not force the bank to commit a crime.

The Court of Appeal also approved the use of a letter to the court from the bank as evidence of its suspicion. Provision of evidence in these circumstances is permitted under s333(2)(b) of Proceeds of Crime Act as an exception to the tipping off provisions.

10.5.3 Where the NCA consents

In continuing with a transaction you will have to show that either:

  • Although you had sufficient suspicion to justify a disclosure to the NCA, your concerns were not such as to render them accountable on a constructive trustee basis. Courts are likely to take into account the fact that you will generally operate in the regulated sector, and assume a degree of sophistication as a result of anti-money laundering training. Solicitors are expected to be able to account for decisions to proceed with transactions.
  • Your suspicions were either removed or reduced by subsequent information or investigations.

The Courts have provided limited assistance in this area. Bank of Scotland v A Limited [2001]1WLR 751 stated that complying with a client's instructions was a commercial risk which a bank had to take. While the court gave some reassurance on the unlikelihood of any finding of dishonesty against an institution that had sought guidance from the court and did not pay funds away, this is of limited assistance because it is for the positive act of paying away funds that protection will be needed.

Such protection is not readily available. In Amalgamated Metal Trading v City of London Police [2003] 1 WLR 2711 the court held that while a court could make a declaration on whether particular funds were the proceeds of crime, a full hearing would be required with both the potential victim and the client participating. There would have to be proof on the balance of probabilities that the funds were not the proceeds of crime. In practice this is highly unlikely to be practical.

10.6 Notify your professional indemnity insurers

You must notify your insurers at the earliest opportunity of any circumstances that might give rise to a claim. You should consider notifying your insurers whenever you make a disclosure to the NCA. In particular:

  • you may be unable to follow clients' instructions, eg:
    • where consent has not been given by the NCA
    • where you judge you may be exposing yourself to a civil claim, so may face a claim from the client for failure to meet the terms of your retainer
     
  • the NCA has given consent, but where you fear civil liability. Consider whether to not proceed with the transaction.

Any disclosure made to insurers should clearly state any money laundering issues, that a disclosure has been made to the NCA and, if known, the NCA's response.

You may be concerned about tipping off offences under the Proceeds of Crime Act 2002 when talking to your insurer.

A key element of the offence is the likelihood of prejudicing an investigation. The risk of this is small when disclosing to a reputable insurer. Insurers are also regulated for the purposes of anti-money laundering and subject to the same obligations.

For further advice on tipping off, see chapter 5.8  

For further information about avoiding tipping off in a particular case, contact the NCA's Financial Intelligence Helpdesk on 020 7238 8282.

 
 
 

Latest Version

Recommended Support