Anti-money laundering
Chapter 5 – money laundering offences
5.1General comments
The Proceeds of Crime Act 2002 (POCA) created a single set of money laundering offences applicable throughout the UK to the proceeds of all crimes. It also creates a disclosure regime, which makes it an offence not to disclose knowledge or suspicion of money laundering, but also permits persons to be given consent in certain circumstances to carry out activities which would otherwise constitute money laundering.
5.2Application
POCA applies to all solicitors, although only some offences can be committed by persons within the regulated sector or by nominated officers.
5.3Mental elements
There are four mental elements which are relevant to offences under POCA, namely:
- knowledge
- suspicion
- reasonable grounds for suspicion
- beliefs on reasonable grounds
For the principal offences of money laundering the prosecution must prove that you have knowledge or suspicion that the property involved is criminal property.
A person will have a defence to a principal offence if they know or believe on reasonable grounds that the criminal conduct involved was exempt overseas criminal conduct.
For the failure to disclose offences, where you are acting in the regulated sector, you must disclose if you have knowledge, suspicion or reasonable grounds for suspicion; while if you are not in the regulated sector you will only need to make a disclosure if you have knowledge or suspicion.
These four concepts are not terms of art; they are not defined within POCA and should be given their everyday meaning. However, case law has provided some guidance on how they should be interpreted.
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5.3.1Knowledge
Knowledge means actual knowledge. There is some suggestion that wilfully shutting one's eyes to the truth may amount to knowledge. However, the current general approach from the courts is that nothing less than actual knowledge will suffice.
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5.3.2Suspicion
The term 'suspects' is one which the court has historically avoided defining; however because of its importance in English criminal law, some general guidance has been given. In the case of Da Silva [1996] EWCA Crim 1654, which concerned the old money laundering legislation, Longmore LJ stated:
'It seems to us that the essential element in the word "suspect" and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice.'
There is no requirement for the suspicion to be clear or firmly grounded on specific facts, but it should be settled.
The test for whether you hold a suspicion is a subjective one.
If you think a transaction is suspicious, you are not expected to know the exact nature of the criminal offence or that particular funds were definitely those arising from the crime. You may have noticed something unusual or unexpected – perhaps something that does not quite 'sit right' or make commercial sense. Mere speculation or gossip is not necessarily sufficient, but you do not have to have evidence that money laundering is taking place to have suspicion.
Chapter 11 of this practice note contains a number of standard warning signs which may give you a cause for concern; however, whether you have a suspicion is a matter for your own judgement. To help form that judgement, consider talking through the issues with colleagues or with the Law Society. You could take legal advice, possibly from another solicitor on the Law Society's AML directory. Listing causes for concern can also help focus your mind.
If you have not yet formed a suspicion but simply have cause for concern, you may choose to ask the client or others more questions. This choice depends on what you already know, and how easy it is to make enquiries without the risk of tipping-off.
If you think your own client is innocent but suspect that another party to a transaction is engaged in money laundering, you may still have to consider referring your client for specialist advice regarding the risk that they may be a party to one of the principal offences.
5.3.3Reasonable grounds to suspect
The issues here are the same as for the mental element of suspicion, except that it is an objective test. So the question is not merely did you suspect, but were there factual circumstances from which an honest and reasonable person engaged in a business in the regulated sector would have inferred knowledge or formed the suspicion that another was engaged in money laundering.
5.4Principal money laundering offences
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5.4.1General comments
Money laundering offences assume that a criminal offence has occurred in order to generate the criminal property which is now being laundered. This is often known as a predicate offence. No conviction for the predicate offence is necessary for a person to be prosecuted for a money laundering offence.
The principal money laundering offences apply to money laundering activity which occurred on or after 24 February 2003 as a result of the Proceeds of Crime Act 2002 (Commencement No. 4, Transitional Provisions & Savings) Order 2003.
If the money laundering occurred or started before 24 February 2003, the former legislation will apply. If the money laundering occurred or started before 24 February 2003, the former legislation will apply – see the second edition of
Money Laundering Legislation: Guidance for Solicitors 2002 (PDF, 242kb)The conduct giving rise to the criminal property can occur before 24 February 2003.
When considering the principal money laundering offences, be aware that it is also an offence to conspire or attempt to launder the proceeds of crime, or to counsel, aid, abet or procure money laundering.
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5.4.2Section 327 – concealing
A person commits an offence if he conceals, disguises, converts, or transfers criminal property, or removes criminal property from England and Wales , Scotland or Northern Ireland.
Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement, ownership or any rights connected with it. It includes mixing property with other non-criminal property.
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5.4.3Section 328 – arrangements
A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.
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What is an arrangement?
Arrangement is not defined in Part 7 of POCA. The arrangement must exist and have practical effects relating to the acquisition, retention, use or control of property.
An agreement to make an arrangement will not always be an arrangement. The test is whether the arrangement does in fact, in the present and not the future, have the effect of facilitating the acquisition, retention, use or control of criminal property by or on behalf of another person.
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What is not an arrangement?
Bowman v Fels [2005] EWCA Civ 226 held that s328 does not cover or affect the ordinary conduct of litigation by legal professionals, including any step taken in litigation from the issue of proceedings and the securing of injunctive relief or a freezing order up to its final disposal by judgment.
Our view, supported by Counsel's opinion, is that dividing assets in accordance with the judgment, including the handling of the assets which are criminal property, is not an arrangement. Further, settlements, negotiations, out of court settlements, alternative dispute resolution and tribunal representation are not arrangements. However, the property will generally still remain criminal property and you may need to consider referring your client for specialist advice regarding possible offences they may commit once they come into possession of the property after completion of the settlement.
The recovery of property by a victim of an acquisitive offence will not be committing an offence under either s328 or s329 of the Act.
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Sham structures
Sham structures created for the purposes of money laundering remain within the ambit of s328. Our view is that shams arise where an acquisitive criminal offence is committed and settlement negotiations or litigation are intentionally fabricated to launder the proceeds of that separate crime.
A sham can also arise if a whole claim or category of loss is fabricated to generate the criminal property. In this case, money laundering for the purposes of POCA cannot occur until a settlement payment or payment of damages has been made.
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Entering into or becoming concerned in an arrangement
To enter into an arrangement is to become a party to it.
To become concerned in an arrangement suggests a wider practical involvement such as taking steps to put the arrangement into effect.
Both 'enter into' and 'becomes' concerned in' describe an act that is the starting point of an involvement in an existing arrangement.
Although the Court did not directly consider the conduct of transactional work, its approach to what constitutes an arrangement under section 328 provides some assistance in interpreting how that section applies in those circumstances.
Our view is that Bowman v Fels supports a restricted understanding of the concept of entering into or becoming concerned in an arrangement with respect to transactional work. In particular:
- entering into or becoming concerned in an arrangement involves an act done at a particular time
- an offence is only committed once the arrangement is actually made, and
- preparatory or intermediate steps in transactional work which does not itself involve the acquisition, retention, use or control of property will not constitute the making of an arrangement under s328
If you are doing transactional work and become suspicious, you have to consider:
- whether an arrangement exists and, if so, whether you have entered into or become concerned in it or may do so in the future
- if no arrangement exists, whether one may come into existence in the future which you may become concerned in
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5.4.4Section 329 – acquisition, use or possession
A person commits an offence if he acquires, uses or has possession of criminal property.
5.5Defences to principal money laundering offences
You will have a defence to a principal money laundering offence if:
- you make an authorised disclosure prior to the offence being committed and you gain appropriate consent (the consent defence)
- you intended to make an authorised disclosure but had a reasonable excuse for not doing so (the reasonable excuse defence)
In relation to s329 you will also have a defence if you received adequate consideration for the criminal property (the adequate consideration defence).
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5.5.1Authorised disclosures
Section 338 authorises you to make a disclosure regarding suspicions of money laundering which will be a defence to the principal money laundering offences.
It specifically provides that you can make an authorised disclosure either before money laundering has occurred, while it is occurring but as soon as you suspect, or after it has occurred if you had a reasonable excuse for not disclosing earlier.
If a disclosure is authorised, it does not breach any rule which would otherwise restrict it, such as the Solicitors' Code of Conduct rule relating to client confidentiality.
Where your firm has a nominated officer, you should make your disclosure to the nominated officer. The nominated officer will consider your disclosure and decide whether to make an external disclosure to SOCA. If your firm does not have a nominated officer, you should make your disclosure directly to SOCA.
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Consent defence
If you have a suspicion that a retainer you are acting in will facilitate money laundering, you can make an authorised disclosure to SOCA via your nominated officer and seek consent to undertake the further steps in the retainer which would constitute a money laundering offence.
For further information on how to make an authorised disclosure to SOCA and the process by which consent is gained. See chapter 8 of this practice note.
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Reasonable excuse defence
This defence applies where an authorised disclosure was intended but not made prior to the offence being committed, and there was a reasonable excuse for the disclosure not being made.
Reasonable excuse has not been defined by the courts.
It is our view, supported by counsel, that common law privilege would be a reasonable excuse. This view is based on the finding in Bowman v Fels that legal professional privilege applies to the principal money laundering offences. You should consider the full discussion on legal professional privilege at Chapter 6 of this practice note.
There may be other circumstances which would provide a reasonable excuse, however these are likely to be narrow. We recommend that you clearly document the reason for not making a disclosure on this ground.
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Where you suspect part way through
It is not unusual for a transactional matter to seem legitimate early in the retainer, but to develop in such a way as to arouse suspicion later on. It may be that certain steps have already taken place which you now suspect facilitated money laundering; while further steps are yet to be taken which you also suspect will facilitate further money laundering.
Section 338(2A) provides that you may make an authorised disclosure in these circumstances if:
- at the time the initial steps were taken they were not a money laundering offence because you did not have good reason to know or suspect that the property was criminal property; and
- you make a disclosure of your own initiative as soon as practicable after you first know or suspect that criminal property is involved in the retainer.
In such a case you would make a disclosure seeking consent for the rest of the transaction to proceed, while fully documenting the reasons why you came to know or suspect that criminal property was involved and why you did not suspect this to be the case previously.
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5.5.2Adequate consideration defence
This defence applies if there was adequate consideration for acquiring, using and possessing the criminal property, unless you know or suspect that those goods or services may help another to carry out criminal conduct.
The Crown Prosecution Service guidance for prosecutors says the defence applies where professional advisors, such as solicitors or accountants, receive money for or on account of costs, whether from the client or from another person on the client's behalf. Disbursements are also covered. The fees charged must be reasonable, and the defence is not available if the value of the work is significantly less than the money received.
The transfer of funds from client to office account, or vice versa, is covered by the defence.
Returning the balance of an account to a client may be a money laundering offence if you know or suspect the money is criminal property. In that case, you may need to make an authorised disclosure and obtain consent to deal with the money before you transfer it.
Reaching a matrimonial settlement or an agreement on a retiring partner's interest in a business is unlikely to constitute adequate consideration for receipt of criminal property, as in both cases the parties would only be entitled to a share of the legitimately acquired assets of the marriage or the business. This is particularly important where your client would be receiving the property as part of a settlement which would be exempted from s328 due to the case of Bowman v Fels.
The defence is more likely to cover situations where:
- a third party seeks to enforce an arms length debt and, unknown to them, is given criminal property in payment for that debt
- a person provides goods or services as part of a legitimate arms length transaction but unknown to them is paid from a bank account which contains the proceeds of crime
5.6Failure to disclose offences – money laundering
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5.6.1General comments
The failure to disclose provisions apply where the information on which the knowledge or suspicion is based, or which gives reasonable grounds for knowledge or suspicion, came to a person on or after 24 February 2003.
If the information came to a person before 24 February 2003, the old law applies.
For all failure to disclose offences you must either:
- know the identity of the money launderer or the whereabouts of the laundered property, or
- believe the information on which his suspicion was based may assist in identifying the money launderer or the whereabouts of the laundered property
If you do not have this information, then the disclosure will be of limited or no use to SOCA, as there will be no way for them to investigate the disclosure. As such, a public policy decision has been made to permit people not to make a disclosure under those limited circumstances.
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5.6.2Section 330 – failure to disclose: regulated sector
A person commits an offence if
- he knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering, and
- the information on which his suspicion is based comes in the course of business in the regulated sector, and
- he fails to disclose that knowledge or suspicion, or reasonable grounds for suspicion, as soon as practicable to a nominated officer or SOCA
Our view is that delays in disclosure arising from taking legal advice or seeking help from the Law Society may be acceptable provided you act promptly to seek advice.
The test for knowledge or suspicion is objective: were there factual circumstances from which an honest and reasonable person engaged in a business in the regulated sector would have inferred knowledge or formed the suspicion that another was engaged in money laundering?
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5.6.3Section 331 – failure to disclose: nominated officer in the regulated sector
A nominated officer in the regulated sector commits an offence if, as a result of an internal disclosure under s330, he knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering and he fails to disclose as soon as practicable to SOCA.
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5.6.4Section 332 – failure to disclose: nominated officer in the non-regulated sector
An organisation which does not carry out relevant activities and so is not in the regulated sector, may decide on a risk-based approach to set up internal disclosure systems to assist their staff to comply with their obligations under POCA and appoint a person to receive internal disclsoures.
A nominated officer in the non-regulated sector commits an offence if, as a result of a disclosure, he knows or suspects that another person is engaged in money laundering and fails to disclose as soon as practicable to SOCA.
The test is a subjective one: did you know or suspect in fact?
5.7Exemptions to failure to disclose offences
There are three situations in which you have not committed an offence for failing to disclose:
- you have a reasonable excuse
- you are a professional legal adviser and the information came to you in privileged circumstances
- you did not receive appropriate training from your employer
The first defence is the only one which applies to all three failure to disclose offences; the other two defences are only specifically provided for persons in the regulated sector who are not nominated officers.
All of the failure to disclose sections also reiterate that the offence will not be committed if the property involved in the suspected money laundering is derived from exempted overseas criminal conduct .
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5.7.1Reasonable excuse
No offence is committed if there is a reasonable excuse for not making a disclsoure, but there is no judicial guidance on what might constitute a reasonable excuse.
However, as with reasonable excuse under the principal money laundering offences, where common law legal professional privilege has not been expressly excluded, following the reasoning in Bowman v Fels, it is considered that the decision not to make a disclosure because the information was legally professionally privileged would be a reasonable excuse.
You should carefully document any reasons for not making a disclosure under this section.
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5.7.2Privileged circumstances
No offence is committed if the information or other matter giving rise to suspicion comes to a professional legal adviser in privileged circumstances.
You should note that receipt of information in privileged circumstances is not the same as legal professional privilege. It is a creation of POCA designed to comply with the exemptions from reporting set out in the European directives.
Privileged circumstances means information communicated:
- by a client, or a representative of a client, in connection with the giving of legal advice to the client, or
- by a client, or by a representative of a client, seeking legal advice from you
- by a person in connection with legal proceedings or contemplated legal proceedings
The exemption will not apply if information is communicated or given to the solicitor with the intention of furthering a criminal purpose.
The Crown Prosecution Service guidance for prosecutors indicates that if a solicitor forms a genuine, but mistaken, belief that the privileged circumstances exemption applies (for example, the client misleads the solicitor and uses the advice received for a criminal purpose) the solicitor will be able to rely on the reasonable excuse defence.
For a further discussion of privileged circumstances see Chapter 6.
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5.7.3Lack of training
Employees within the regulated sector who have no knowledge or suspicion of money laundering, even though there were reasonable grounds for suspicion, have a defence if they have not received training from their employers. Employers may be prosecuted for a breach of the Money Laundering Regulations 2007 if they fail to train staff.
5.8Tipping off
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5.8.1Offences
The two offences, found in sections 333 and 342 of POCA, mean that it is an offence to make a disclosure which is likely to prejudice an investigation if the person knows or suspects that a disclosure has been made to a nominated officer or to SOCA, or if he knows or suspects that a money laundering investigation is being, or will be, carried out.
You must not tell the person named in the disclosure that a disclosure has been made, or that the authorities are carrying out, or are intending to carry out, a money laundering investigation.
An investigation may also be prejudiced and an offence committed if you inform someone other than the person named in the disclosure. There are important exceptions/defences to this section and they are set out below.
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5.8.2Making enquiries of a client
You will often want to make preliminary enquiries of your client, or a third party, to obtain further information to help you to decide whether you have a suspicion. You may also need to raise questions during a retainer to clarify such issues.
There is nothing in POCA which prevents you making normal enquiries about your client's instructions, and the proposed retainer, in order to remove, if possible, any concerns and enable the firm to decide whether to take on or continue the retainer.
These enquiries will not amount to tipping off, unless you know or suspect that a disclosure has already been made or that an investigation is current or impending and make the enquiries in a way which discloses those facts. It is important to note that the offence consists of an unlawful 'disclosure'; enquiries, as such, will not constitute the basis for an offence under section 333 or 342. It is also not tipping off to include a paragraph about your obligations under the money laundering legislation in your firm's standard client care letter.
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5.8.3Defences
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Lack of knowledge of prejudice
It is a defence if you did not know or suspect that the disclosure was likely to prejudice any investigation.
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Giving of legal advice
It is also a defence if the disclosure is made by a legal adviser to a client (or a client's representative) in connection with the giving of legal advice or to any person in connection with legal proceedings or contemplated legal proceedings.
The clarification provided by the decision in Bowman v Fels on the importance of legal professional privilege in relation to the principal money laundering offences also affects how solicitors conducting transactions should approach the exemption for professional legal advisers to the tipping off offences in POCA.
If you are acting in a transaction in circumstances where you have knowledge or suspicion of money laundering, and so are going to risk being concerned in an arrangement at some future date, you have a duty to give legal advice to your client(s), including advice about the possibility of your client committing money laundering offences if the transaction proceeds without 'appropriate consent' having been obtained.
It is considered that the judgment in Bowman v Fels further supports the statutory exemption, namely that professional legal advisers have a discretion to give advice to their clients about disclosures to SOCA, although there remains no absolute duty to do so.
For example, if a client is aware that his bank has been in contact with the police, he is entitled to seek advice on his legal position. You are entitled to advise him that he may be the subject of a money laundering investigation without the risk of being prosecuted for either offence, even if such advice might prejudice the investigation.
In providing such advice you should not aid, abet, counsel or procure your client to commit one of the principal money laundering offences, for instance, by also advising the client to remove his money from the bank or to take any steps to obstruct/frustrate the investigation. When you act in such a situation, you should make a full attendance note at the time, setting out in detail the advice sought and received; the reasons for it and the circumstances in which this took place. This note should be brought to the attention of your nominated officer at once.
Information will sometimes come to you at an early stage before any disclosure has been made to the authorities when it may be in your client's interests for you to make an authorised disclosure. It is not tipping off the client in such circumstances to advise him of this available course of action, as the tipping off offence only occurs after disclosure, although you should consider s342 and whether you know an investigation is already ongoing. It would also not appear to be a tipping off offence for you to inform the client that you intend to make an authorised disclosure in such circumstances.
Once the POCA provisions are explained to them, clients may wish to make their own disclosure or to make a joint disclosure with you, as this may provide a defence to the principal money laundering offences.
If the client does not agree with a disclosure being made to SOCA, you should consider withdrawing from the case.
If you inform your client of a disclosure to SOCA with the intention on your part of furthering a criminal purpose, both under the common law and privileged circumstances, the communication loses its privileged status and falls outside the exemption and the defence is not available.
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