Contents
12.1 General comments
Chapters 5 and 6 of this practice note worked through the theory of the law relating to when a money laundering offence has occurred, the requirements for making a disclosure and when you are unable to make a disclosure because of LPP or are exempted from making a disclosure due to privileged circumstances.
This chapter contains:
- flowcharts to give an overview of how all the obligations link together
- examples to help put the theory into context
This chapter does not replace application of the legislation to your situation; nor should it be viewed without reference to the detailed discussion of the law in the rest of the practice note.
Further examples may be added to future editions of this practice note.
Do I have a suspicion that a principal money laundering offence is occurring?
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12.2 Principal offences
If you suspect that property involved in a retainer is criminal property, offences under section 327 and section 329 are relatively straightforward to assess. However, an arrangement offence under section 328 may be more complicated, particularly with transactional matters.
12.2.1 Do I have an arrangement?
Under section 328, an arrangement must be created at a particular point in time. If you have formed a suspicion, first consider whether an arrangement already exists. For example, a client may instruct you to act for them in the purchase of a property, including the drafting of the contract and transfer documents. When you are instructed there will already an arrangement between the vendor and the purchaser, but not yet an arrangement for the purposes of section 328.
If an arrangement within section 328 already exists, any steps you take to further that arrangement will probably mean you are concerned in it. In this case, you would immediately need to consider making a disclosure.
12.2.2 No pre-existing arrangement
If there is no pre-existing arrangement, the transactional work you carry out may bring an arrangement under section 328 into existence. You may become concerned in the arrangement by, for example, executing or implementing it, which may lead you to commit an offence under section 328, and possibly under section 327 or 329.
Consider whether you need to make an authorised disclosure to:
If you are acting within the regulated sector, consider whether you risk committing a failure to disclose offence, if you do not make a disclosure to SOCA.
The following two flowcharts show the issues to consider when deciding whether to make a disclosure to SOCA.
I suspect continuation of a retainer will lead to me being a party to a principal offence. Do I have a defence?
I suspect someone else of a principal offence, or should reasonably suspect them, and am concerned I may commit a failure to disclose offence. Do I have a defence?
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12.3 Should I make a disclosure?
12.3.1 Property transactions
Considering further the earlier example of a suspect contract for the purchase of a property, the following issues will be relevant when considering the disclosure requirements under POCA.
- If the information on which your suspicion is based is covered by LPP and the crime/fraud exception does not apply, you cannot make a disclosure under POCA.
- If the information was received in privileged circumstances and the crime/fraud exception does not apply, you are exempt from the relevant provisions of POCA, which include making a disclosure to SOCA.
- If neither of these situations applies, the communication will still be confidential. However, the material is disclosable under POCA and an authorised disclosure should be made.
You have the option of withdrawing from the transaction rather than making an authorised disclosure, but you may still need to make a disclosure to avoid committing a failure to disclose offence.
What if I cannot disclose?
If you decide that either you cannot make a disclosure due to LPP or you are exempt from making a disclosure due to privileged circumstances, you have two options:
- you can approach the client for a waiver of privilege to make a disclosure and obtain consent to carry out the prohibited act, or
- you should consider your ethical obligations and whether you need to withdraw from the transaction
Waiver of privilege
When approaching your client for a waiver of privilege, you may feel less concerned about tipping off issues if your client is not the suspect party but is engaged in a transaction which involves criminal property. However, if you suspect that your client is implicated in the underlying criminal conduct, consider the tipping off offence and whether it is appropriate to discuss these matters openly with your client.
If you raise the matter with your client and they agree to waive privilege, you can make a disclosure to SOCA on your own or jointly with your client and seek consent if required.
If you are acting for more than one client on a matter, all clients must agree to waive privilege before you can make a disclosure to SOCA.
Refusal to waive privilege
Your client, whether sole or one of a number for whom you act, may refuse to waive privilege, either because he does not agree with your suspicions or because he does not wish a disclosure to be made. Unless your client provides further information which removes your suspicions, you must decide whether you are being used in a criminal offence, in which case neither LPP nor privileged circumstances apply.
If your client refuses to waive privilege but accepts that in proceeding with the transaction he may be committing an offence, you might conclude that you are being used in a criminal offence in which case neither exemption applies. In such circumstances it is not appropriate to tell the client that you are making the disclosure, as the risks of tipping off are increased.
If you are unable to make a disclosure, consider the ethical and civil risks of continuing in the retainer and consider withdrawing.
Consent and progressing the retainer
If you make a disclosure and consent is needed, consider whether you can continue working on the retainer before you receive that consent.
This will depend on whether an arrangement already exists or whether the further work will bring the arrangement into existence. Provided there is no pre-existing arrangement you should be free to continue your preparatory activities. However, the arrangement/prohibited act should not be finalised without appropriate consent.
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12.3.2 Company transactions
Criminal property in a company
The extent of the regulatory and legal obligations affecting companies and businesses means that there is an increased possibility that breaches will have been committed by your client that constitute criminal conduct and give rise to criminal property under POCA.
For example, the Companies Act 1985 contains many offences which will give rise to criminal property as defined by POCA. There does not need to be a criminal conviction, nor even a prosecution underway. If criminal conduct has, (or is suspected to have) taken place, and a benefit has been achieved, the result is actual or notional criminal property.
For a number of offences, the only benefit to your client (for the purposes of POCA) is saved costs. For example, it is criminal conduct to fail to notify the Information Commissioner that a company will be processing 'personal data'. The saved notification fee should be treated as criminal property for the purposes of POCA.
It may be difficult to establish whether property or funds which are the subject of the transactions are the 'saved costs' in whole or in part and are therefore tainted. If you are dealing with the whole of a company's business or assets, no distinction is necessary. In other cases, it would be wrong to assume that because some assets are tainted, they all are, or that you are dealing with the tainted ones.
In most cases, unless there is some basis for suspecting that the assets in question result from saved costs, no disclosure/consent may be required in respect of the principal offence. However a disclosure may still be required in respect of the failure to disclose offences.
Mergers and acquisitions
In typical corporate merger/acquisition/sale/take-over transactions, there are a number of issues to consider.
Solicitors acting in company transactions will be acting in the regulated sector and so will have dual disclosure obligations, under the failure to disclose offence and in respect of the principal offences.
Different tests have to be applied to determine whether a disclosure can be made. When you are considering whether you are obliged to make a disclosure to avoid committing a failure to disclose offence, either LPP or privileged circumstances may apply.
When you are considering whether you must make a disclosure as a defence to the principal offences, only LPP is relevant.
For example, when you are acting for a vendor, you may receive information from the client about the target company which is protected under LPP and exempt from disclosure due to privileged circumstances. However, you may receive information from other representatives of the client (such as other professional advisers) which may only be exempt due to privileged circumstances. If information received is initially privileged, you need to consider whether the privilege is lost in the course of the transaction.
The information may be put into a data room and the purchaser, as part of the due diligence inquiries, may raise questions of the vendor's solicitors which, in effect, result in the information being received again by the vendor's solicitor.
That second receipt from the purchaser, or their solicitor, would not be protected by privileged circumstances. It will lose its exemption from disclosure unless the information was also subject to LPP which had not been waived when it was placed in the data room (eg a letter of advice from a solicitor to the vendor).
Consider whether privilege is removed by the crime/fraud exception. You may suspect, or have reasonable grounds to suspect someone of money laundering (which may simply mean they possess the benefits of a criminal offence contrary to section 329). Where the information on which the suspicion is based could be protected by LPP or exempted due to privileged circumstances, consider whether the crime/fraud exception applies.
This may depend on:
- the nature of the transaction
- the amount of the criminal property
- the strength of the evidence
These factors are considered in more detail below with respect to specific types of company sales.
Asset sales
In the case of an asset sale, all or some of the assets of the business may be transferred. If any asset transferred to a new owner is criminal property, a money laundering offence may be committed:
- The vendor may commit a section 327 offence by transferring the criminal property.
- Both the vendor and purchaser may be entering into an arrangement contrary to section 328.
- The purchaser may be committing a section 329 offence by possessing the criminal property.
Adequate consideration defence
When looking at the purchaser's position, you will need to consider whether there would be an adequate consideration defence to a section 329 possession offence. This is where the purchase price is reasonable and constitutes adequate consideration for any criminal property obtained. In such a case, should the purchaser effectively be deprived of the benefit of that defence by section 328.
It is a question of interpretation whether sections 328 and 329 should be read together such that, if the defence under section 329 applies, an offence will also not be committed by the vendor under section 328. You should consider this point and take legal advice as appropriate.
Disclosure obligations after completion
As well as making disclosures relating to the transaction, vendors and purchasers will need to consider disclosure obligations in respect of the position after completion.
The purchaser will, after the transaction, have possession of the assets and may be at risk of committing a section 329 offence (subject to the adequate consideration defence outlined above).
The vendor will have the sale consideration in their possession. If the amount of the criminal property is material, the sale consideration may indirectly represent the underlying criminal property and the vendor may commit an offence under section 329.
Whether the criminal property is material or not will depend on its impact on the sale price. For example, the sale price of a group of assets may be £20m. If the tainted assets represent 10 per cent of the total, and the price for the clean assets alone would be £18m, it is clear that the price being paid is affected by, and represents in part, the criminal property.
If a client commits one of the principal money laundering offences, whether you are acting for the vendor or purchaser, you will be involved in a prohibited act. You will need to make a disclosure along with your clients and obtain appropriate consent.
When considering whether to advise your client about their disclosure obligations, remember the tipping off offences.
Am I prevented from reporting due to LPP?
Where you are acting for either the purchaser or vendor and conclude that you may have to make a disclosure and seek consent, first consider whether LPP applies. As explained above, this depends on how you received the information on which your suspicion is based.
Generally, when acting for the purchaser, if the information comes from the data room, LPP will not apply. When acting for the vendor, LPP may apply if the information has come from the client for the purpose of obtaining legal advice.
The crime/fraud exception
Where LPP applies, you will also need to consider whether the crime/fraud exception applies. The test is whether there is prima facie evidence that you are being used for criminal purposes.
Whether the crime/fraud exception applies will also depend on the purpose of the transaction and the amount of criminal property involved. For example, if a company wished to sell assets worth £100m, which included £25m of criminal assets, it would be deemed that the intention was not to use solicitors for criminal purposes but to undertake a legitimate transaction. However, if the amount of criminal property was £75m, the prima facie evidence would be that the company did intend to sell criminal property and the exception would apply to override LPP.
Real cases will not all be so clear-cut. Consider the parties' intentions. If you advise your client of money laundering risks in proceeding with a transaction and the client decides, despite the risks, to continue without making a disclosure, you may have grounds to conclude that there was prima facie evidence of an intention to use your services for criminal purposes and therefore that privilege may be overridden.
Remember that for the purposes of the crime/fraud exception, it is not just the client's intention that is relevant.
Where LPP applies and is not overridden by the crime/fraud exception, it is nonetheless possible for your client to waive the privilege in order for a disclosure to be made.
Share sales
A sale of a company by way of shares gives rise to different considerations to asset sales. Unless shares have been bought using the proceeds of crime they are unlikely to represent criminal property, so their transfer will not usually constitute a section 327 offence, (for the vendor), or a section 329 offence, (for the purchaser).
However the sale of shares could constitute a section 328 offence, depending on the circumstances, particularly if the criminal property represents a large percentage of the value of the target company. Consent may be needed if:
- the benefit to the target company from the criminal conduct is such that its share price has increased
- as part of the transaction directors will be appointed to the board of the target company and they will use or possess criminal property
- the purpose of the transaction is to launder criminal property. That is, it is not a genuine commercial transaction.
Is the share value affected by criminal property?
If a company has been used to commit criminal offences, some or all of its assets may represent criminal property. The value of the shares may have increased as a result of that criminal activity. When the shares are then sold, by converting a paper profit into cash, the vendor and the purchaser have both been involved in a prohibited arrangement.
For example, if 10 per cent of the profits of a company are earned from criminal activity, it is likely that the share price would be lower if only the legitimate profits were taken into account.
However, if the value of the criminal property is not sufficient to affect the purchase/sale price, the transaction is unlikely to be considered a prohibited arrangement since the vendor does not benefit from the company's criminal conduct. For example, a company is being purchased for £100m and within it is £25 of saved costs. If the costs had been paid by the company, it is unlikely that the price would be £99,999,975. The business is still likely to be valued at £100m.
Where criminal property is immaterial
Even if the value of criminal property is very small and immaterial to the purchase price, purchasers still need to consider their position after the acquisition. While shareholders do not possess a company's assets, the target company and directors may subsequently transfer, use or possess the assets for the purposes of the principal money laundering offences in sections 327 and 329.
If as part of the transaction, the purchaser proposes appointing new directors to the board of the target company, those directors may need to make a disclosure and seek consent so that they may transfer use or possess and use the criminal property.
In this case, you, and the vendors and the existing and new directors, may still need to make a disclosure, (subject to LPP issues), and seek consent, because they will be involved in an arrangement which involves the acquisition, use or control of criminal property by the new directors contrary to section 328.
In summary, the position may be as follows where the amount of the criminal property is immaterial:
Shareholders
Generally in a purchase or sale transaction, you will act for the company, not for its shareholders. However it is possible for shareholders to become involved in an arrangement prohibited by section 328. This is most likely to happen when the transaction requires a Class I or Class II circular to shareholders under the listing rules.
Firstly, consider whether the shareholders are, or may become, aware - perhaps through the risk warnings in the circular - of the risk of criminal conduct. Unless they are so aware, they are unlikely to have the necessary suspicion to be at risk of committing a money laundering offence.
Secondly, where shareholders are aware of the criminal conduct, consider whether the amount of criminal property is material to the transaction. That is, it would have an impact on the price or terms. If it is material, by voting in favour of it the shareholders will become concerned in a prohibited arrangement and will be required to make a disclosure and seek consent.
Also consider, in the context of an initial public offering, what risk warnings to include in any prospectus. You may need to give shareholders notice of their disclosure obligations via such a risk warning.
It is good practice to discuss the issue with SOCA to ensure that there are no tipping off concerns if details of the risks are set out in the public circular.
When each shareholder requires consent from SOCA, their express authority to make the disclosure will be required. It may be simplest to ask the shareholders to authorise the board of the vendor to make a disclosure and seek consent on their behalf at the same time as asking them to give conditional approval for the transaction.
Overseas conduct
Where your suspicion of criminal conduct relates in whole or in part to overseas conduct, be aware of the wide definition of criminal conduct.
For example, you might discover or suspect that a company or its foreign subsidiary has improperly manipulated its accounting procedures so that tax is paid in a country with lower tax limits. Or you might form a concern about corrupt payments to overseas commercial agents which might be illegal in the UK.
Even where the conduct is lawful overseas, in serious cases it will still be disclosable if the money laundering is taking place in the UK and the underlying conduct would be criminal if it had occurred in the UK .
In some cases the only money laundering activity in the UK may be your involvement in the transaction as a UK solicitor.
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