MONEY LAUNDERING AND THE DISCLOSURE REGIME: A UK PERSPECTIVE
INTRODUCTION
According to the UK National Crime Agency [NCA], organised crime groups
make use of financial and legal professionals to handle their financial affairs,
often involving the use of property purchases and legitimate or quasi-legitimate
businesses, typically those with a high cash turnover, to launder criminal
proceeds as well as to provide cover for the purchase, delivery and sale of illicit
goods. The NCA notes that the number of criminals who specialise in money
laundering alone, providing more sophisticated laundering services to other
criminals, is believed to be small compared to the total number of criminals
engaged in money laundering activity. Nevertheless, they are believed to be
responsible for laundering a significant proportion of all proceeds of crime and
their ability to process more value per transaction increases the likelihood that
serious organised criminals will be interested in using their services.
It is estimated that at least £15 billion per annum is generated by organised crime
in the UK. The NCA points to the use of witting or unwitting “gatekeepers”
such as lawyers and financial professionals using their professional knowledge
and expertise to manage assets on behalf of criminal organisations. Criminals
may invest in property, shares, trusts and pensions, and hedge funds, as well as
accumulating high value goods, such as jewellery, vehicles, art and other
collectable items. These assets may be held in the names of friends or family to
conceal their true ownership.1
THE LEGISLATIVE FRAMEWORK TO PREVENT MONEY LAUNDERING
Historical perspective
Laundering the proceeds of drug trafficking was first criminalised in the UK by
the Criminal Justice (International Co-operation) Act 1990,2 by which Parliament
gave domestic effect to the requirements of the United Nations Convention
See NCA’s UK Threat Assessment of Organised Crime 2009-2010
Which was repealed but enacted in identical form as sections 49-51 of the Drug Trafficking Act
1994.
1
2
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against Illicit Traffic in Narcotic and Psychotropic Substances (“the Vienna
Convention”) adopted in December 1988.
Two years after the Vienna Convention, the Council of Europe Convention on
Laundering, Search and Confiscation of the Proceeds of Crime (“the Strasburg
Convention”) was signed. The preamble recognised that to deprive criminals of
the proceeds of their crimes was a powerful weapon in the fight against
organised crime. Article 6 of the Strasbourg Convention required the parties to
combat the laundering of the proceeds of crime generally. Effect was given to
the Directive in 1993 by the insertion into the Criminal Justice Act 1988 of
sections 93A-93D. 1993 also saw the first Money Laundering Regulations.
Since the first legislative steps to tackle drug traffickers, Parliament has
recognised that the laundering of criminal property will often take place at arm’s
length from the criminal conduct and unwittingly involve perfectly reputable
businesses and professionals. For this reason, regulating financial institutions
and requiring systems to be put in place to identify and report suspicious
transactions to the authorities has always been a feature of Parliament’s efforts to
combat money laundering.
Today the money laundering legislative framework in the UK has been
consolidated in Part 7 of the Proceeds of Crime Act 2002, together with the
Terrorism Act 20003 and the Money Laundering Regulations 2007.
Part 7, Proceeds of Crime Act 2002 – “POCA”
The Act:

creates a single set of money laundering offences, applicable throughout the
UK;

re-defines money laundering and the money laundering offences, and creates
new mechanisms for investigating and recovering the proceeds of crime; and

revises and consolidates the requirement for those affected to report
suspected money laundering transactions
Detailed consideration of the Terrorism Act is beyond the scope of this course; s.18 makes it an
offence to enter into or become concerned in an arrangement which facilitates the retention or
control by or on behalf of another person of terrorist property (defined in s.14)
3
2
Part 7 of the Act is self-contained with its own definition section. It applies to
offences committed after 24th February 2003.
The POCA anti-money laundering framework can be broken down into three
parts:

First, the criminalising of money laundering by three principal money
laundering offences: sections 327, 328 and 329, punishable by sentences of
imprisonment of up to 14 years’ imprisonment;

Secondly, sections 330-332 and 333A, intended to encourage reporting of
known or suspected money laundering, and discourage “tipping off”,
creating offences punishable by sentences of imprisonment of up to five
years’ and two years’ imprisonment respectively;

Thirdly, the requirement of the Money Laundering Regulations 2007 that
lawyers, financial professionals and other sectors establish systems to
prevent use of their services for money laundering or terrorist financing.
THE PRINCIPAL MONEY LAUNDERING OFFENCES
Section 327:
Concealing, disguising, converting, transferring criminal property or removing it
from the jurisdiction.
Section 328:
Entering into or becoming concerned in (a money laundering) arrangement.
Section 329:
Acquiring, using or possessing criminal property.
Definitions
The term ‘criminal property’ is central; whereas the previous statutory regimes
focussed upon the person whose criminal conduct had produced the property in
question, under Part 7 of POCA the focus is on the property, not the offender.
3
Property is criminal property if:
(a)
it constitutes a person’s benefit from criminal conduct or it represents such a
benefit (in whole or part and whether directly or indirectly), and
(b)
the alleged offender knows or suspects that it constitutes or represents such
a benefit.4
Criminal conduct is conduct which:
(a)
constitutes an offence in any part of the UK, or
(b)
would constitute an offence in any part of the UK if it occurred there.5
A person benefits from his criminal conduct if he obtains property or a pecuniary
advantage as a result of or in connection with such conduct [s.340(5) and (6)].
“Property” is broadly defined in section 340(9) to mean all property wherever
situated including money, all forms of real or personal property, things in action
and other intangible or incorporeal property.
In any prosecution, the prosecution has to prove that the property in question is
criminal property. It can do so either by (a) showing that it derives from conduct
of a specific kind or kinds and that conduct of that kind or those kinds is
unlawful (e.g. drug trafficking), or (b) by evidence of the circumstances in which
the property is handled, which are such as to give rise to the irresistible inference
that it can only be derived from crime.6
Knowledge and suspicion
It is an element of each of the three offences that the defendant must know or
suspect that the property is or represents either his own or another’s benefit from
criminal conduct.
In general terms, “suspicion” means that the defendant must have thought that
there was a more than fanciful possibility that the property is or represents either
his own or another’s benefit from criminal conduct. Although a vague feeling of
unease will not amount to a suspicion, the suspicion does not have to be “clear”
Section 340(3) POCA 2002
Section 340(2)
6 R v Anwoir and others [2008] 2 Cr. App. R. 36, CA
4
5
4
or “firmly grounded and targeted on specific facts”. A suspicion will only need
to be based on “reasonable grounds” if an offence so specifies.7
Property will not be the proceeds of criminal conduct solely because the accused
suspected that it was: his belief that he was engaged in money laundering does
not give the property he was concealing, disguising etc. the character of
“proceeds of criminal conduct”: R. v. Loizou8 This means that a person with a
mistaken belief he is dealing with criminal property is not a money launderer.
Limitations to the offences
This part of POCA 2002 does not provide “defences”; instead there are
limitations on the scope of each. Accordingly, if the issue is raised in evidence, it
is for the prosecution to prove that a defendant does not fall within a limitation
rather than for the defendant to prove that he does.
The first and most important exemption in this context is that a person does not
commit a money laundering offence under Sections 327-329 if:
(a) he makes an authorised disclosure under section 338 and (if the
disclosure is made before he does the act mentioned in subsection (1),
he has the appropriate consent;
(b) he intended to make such a disclosure but had a reasonable excuse
for not doing so;
(c) the act he does is done in carrying out a function he has relating to the
enforcement of any provision of this Act or of any other enactment
relating to criminal conduct or benefit from criminal conduct.
What this means is that if a disclosure is made and either NCA consents or the
moratorium period expires without a restraint order being applied for, the
transaction can proceed and the person making the disclosure will not be guilty
of a money laundering offence. Even if what he deals with is the proceeds of
crime, it will not be “criminal property”.
There are two further exemptions from liability, namely that a person knows or
reasonably believes that the conduct took place in a country where that conduct
was lawful; or that he is a bank and the money laundering is worth less than
£250. 9
R v. Da Silva [2006] 2 Cr. App. R. 35, CA
[2005] 2 Cr. App. R. 37, CA.
9 Introduced by the Serious Organised Crime and Police Act 2005
7
8
5
Foreign legality exclusion
The offences created by Sections 327, 328, 329, 330, 331 and 333A are not
committed if a person knows or believes on reasonable grounds that the criminal
conduct that produced the laundered property arose from a crime in another
country or territory. Additionally it must be proved that in that particular
country or territory the conduct was not unlawful under the criminal law of that
country or territory at the time it occurred. It should be noted, however, that if
the Secretary of State has by order prescribed criminal conduct by description as
exempt from this exclusion, then the liability for money laundering would
remain whether or not the conduct producing the property was unlawful in the
particular country or territory.
Threshold exclusion
Although in ordinary circumstances a barrister himself conducting public access
work would not be able to rely on this exclusion, it is nevertheless worth
knowing that a bank or deposit-taking body is able to continue to operate a
client’s accounts without the need for consent where the transaction concerns
criminal property with a value of less than £250, and without the risk of
committing a criminal offence.10
Section 327: Concealing etc
A person commits a criminal offence if he conceals, disguises, converts, transfers,
and/or removes criminal property from England and Wales, Scotland or
Northern Ireland.11
Example: A gives B £40,000 as the proceeds of A’s heroin trafficking to deposit in
B’s bank account, to keep it there for two weeks and then withdraw daily
thereafter in £1000 amounts.
On the face of it, this could amount to an offence of converting criminal property.
£250 is the current proscribed “threshold amount”. The exclusion applies to the offences of
s.327 in relation to the conversion or transfer of funds; s.328 becoming concerned in an
arrangement in respect of the acquisition, retention, use or control of criminal property; and s.329
in respect of the acquisition of criminal property.
11 Section 327(1)
10
6
Concealing or disguising criminal property includes concealing or disguising its
nature, source, location, disposition, movement or ownership or any rights with
respect to it.12
The offence is committed if he deals with property [s.340(3)] in a way set out in
s.327(1) and knowing or suspecting that the property constitutes his own or
another’s benefit from criminal conduct or the property represents whether in
whole or part, directly or indirectly, the proceeds of such conduct.
A person is not guilty of this offence if one of the following provisions applies:
i.
he makes an authorised disclosure before acting and does the act
with ‘‘appropriate consent’’;
ii.
he intended to make an authorised disclosure but failed to, and has a
reasonable excuse for his failure;
iii.
he commits one of the acts of money laundering in furtherance of
duties enforcing a provision of the PCA or any other Act relating to
criminal conduct;
iv.
he knows or reasonably believes that the conduct took place in a
country where that conduct was lawful;
v.
he is a bank and the money laundering is worth less than £250.13
Section 328: Arrangements etc
A person commits a criminal offence if he enters into or becomes concerned in an
arrangement which he knows or suspects facilitates (by whatever means) the
acquisition, retention, use or control of criminal property by or on behalf of
another person.14 In practice, this is the POCA offence which is likely to impact
most upon barristers undertaking public access work and is important because,
in a complex laundering arrangement, the legal advisor’s role might be to obtain
and provide a defendant with property from a legitimate source.
The gravamen of this offence is entering into an arrangement: note that a person
Section 327(3)
For each of these exemptions, see Section 327(2) as amended
14 Section 328(1)
12
13
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does not actually have to deal with any property which in whole or in part
represents the proceeds of criminal conduct. Instead he merely has to enter into
or be concerned in an arrangement whereby the retention or control of such
proceeds is facilitated.
Example: “A” (a criminal) purchases a flat using some of the proceeds of his criminal
conduct. Realising he may be arrested, A agrees to sell the flat ‘for a song’ to a close
associate. A engages his solicitor to convey the property. The solicitor knows of A’s
arrest and that the sale is at a substantial undervalue.
The solicitor could be committing the offence of entering into a money laundering
arrangement.
It follows that property acquired legitimately may nevertheless be the proceeds
of criminal conduct if (in whole or part and whether directly or indirectly) it
represents a person’s proceeds of criminal conduct. So, where criminal A
obtained property as a result of or in connection with a crime committed by him
and B, but dissipated the property before giving B his share and used legitimate
assets (e.g. shares) to settle his debt to B instead, the proceeds of sale of the shares
were capable of representing A’s proceeds of criminal conduct; and where A
passed the proceeds of sale of the shares to C to transfer to B, provided C had the
requisite mens rea he was rightly convicted of a money laundering offence: R v
Keith and others.15
Is property ‘criminal property’ for the purposes of section 328 only after some
other offence has been committed, or because of the criminal objective which the
arrangements were designed to achieve? The answer is the former; the definition
of criminal property in s.340(3) does not embrace property that the accused
intends to acquire by criminal conduct.
Property is not criminal property
because the wrongdoing intends that it should be so; the arrangement must
facilitate the acquisition of criminal property not the criminal acquisition of
property: R v Akhtar.16
A person is not guilty of this offence if one of the following provisions applies:
i.
15
16
he makes an authorised disclosure before acting and does the act
[2010] EWCA Crim 477
[2011] EWCA Crim. 146
8
with consent;
ii.
he intended to make a authorised disclosure but failed to do so and
has a reasonable excuse for his failure;
iii.
he commits one of the acts of money laundering in furtherance of
duties enforcing a provision of POCA or any other Act relating to
criminal conduct;
iv.
he knows or reasonably believes that the conduct took place in a
country where that conduct was lawful;
v.
he is a bank and the money laundering is worth less than £250.17
Section 329: Acquisition, use and possession
A person commits a criminal offence if he acquires criminal property, uses
criminal property or has possession of criminal property.18
This offence is widely drawn and includes property which itself is not the
proceeds of crime provided it represents another’s benefit (in whole or in part
and whether directly or indirectly), but for it to be criminal property, the person
must know or suspect it to be so.
Example: ‘A’ (the criminal) purchases a flat using some of the proceeds of his
criminal conduct. Realising he may be arrested, he sells the property ‘for a song’
to a close associate, ‘B’. B quickly sells the property on to ‘C’, again at a
substantial undervalue. C is well aware of the true value.
Again, a person is not guilty of this offence if he can rely on one of the following
exemptions:
i.
he had made an ‘‘authorised disclosure’’ before acting and did the act
with consent;
ii.
he had intended to make a ‘‘authorised disclosure’’ failed to but had a
reasonable excuse for his failure;
17
18
See Section 329(2), as amended
Section 329(1)
9
iii.
he had committed one of the acts of money laundering in furtherance of
his duties in enforcing provisions of POCA or any other Act relating to
criminal conduct;
iv.
he knows or reasonably believes that the conduct took place in a country
where that conduct was lawful;
v.
he is a bank and the money laundering is worth less than £250;
vi.
adequate consideration was given for the acquisition, use or possession of
the property.19
The ‘adequate consideration’ exemption is unique to the section 329 offence. The
following three principles apply to this exemption:
(a)
a person acquires property for inadequate consideration if the value of the
consideration is significantly less than the value of the property;
(b)
a person uses or has possession of property for inadequate consideration if
the value of the consideration is significantly less than the value of the use
or possession;
the provision by a person of goods or services which he knows or suspects
may help another to carry out criminal conduct is not consideration. 20
This means that a fee paid to a criminal associate cannot be consideration.
(c)
THE DISCLOSURE OFFENCES
Sections 330-332 and 333A make provision for offences committed by those
working in the regulated sector. Self-employed barristers undertaking public
access work will principally be concerned with offences under sections 330 and
333A.
Section 330: Failure to disclose in the regulated sector
The regulated sector is defined in Schedule 9 of POCA 2002.
A person in the regulated sector commits an offence if he fails to make a
disclosure of knowledge or suspicion (or reasonable grounds for so knowing or
19
20
See Section 328(2), (3) and (5)
Section 329(3)
10
suspecting) of money laundering which came to him in the course of a business
in the regulated sector. The maximum penalty is five years’ imprisonment.
To be guilty of an offence under this section, four conditions must be satisfied:
(i)
the person knows or suspects, or has reasonable grounds for knowing or
suspecting, that another person is engaged in money laundering [see
s.340(11) below];
(ii)
the information or other matter on which the knowledge, suspicion or the
reasonable grounds for knowing or suspecting came to the person in the
course of a business in the regulated sector;
(iii)
the person can identify the money launderer or the whereabouts of the
laundered property, or he believes or it is reasonable to expect him to
believe that the information he holds will or may assist in identifying the
launderer or the whereabouts of the laundered property;
(iv)
the person does not make a required disclosure to a nominated officer or
an authorised person, as soon as practicable after the information came to
him.
If that person knows, suspects or has reasonable grounds to suspect that another
person is engaged in money laundering he must disclose that information to a
nominated officer (Money Laundering Reporting Officer – ‘MLRO’) or an officer
nominated by Director General of NCA.
Money laundering is defined in section 340(11) as an act which:
(i)
constitutes an offence under section 327, 328 or 329,
(ii)
constitutes an attempt, conspiracy or incitement to commit an offence
under sections 327-329,
(iii)
constitutes aiding, abetting, counselling or procuring the commission of an
offence under sections 327-329, or
(iv)
would constitute an offence in any of the above if done in the United
Kingdom.
In order to comply, a disclosure must give the identity of the suspected person, if
11
known; the whereabouts of the laundered property, so far as it is known; and the
details of the information on which the knowledge or suspicion is based, or
which gives the person reasonable grounds for such knowledge or suspicion.21
Property that the person making the disclosure knows or suspects, or has
reasonable grounds to suspect the other person to be engaged in laundering, is
‘‘laundered property”.22
Section 330 applies a ‘negligence’ test, reflecting the fact that people carrying out
activities in the regulated sector are expected to exercise a higher degree of
diligence in handling transactions than those employed in other businesses. 23
There is, however, a reasonable excuse limitation in Section 330(6), namely that a
person does not commit an offence if:

he has a reasonable excuse for not disclosing the information;

he is a professional legal adviser; and

the information came to him in privileged circumstances (namely a Bowman
v Fels exception, discussed in more detail below); or he does not know or
suspect that another person is engaged in money laundering AND his
employer has not provided him with proper training, i.e. specified by the
Secretary of State.
Section 333A: Tipping-off in the regulated sector
A person commits an offence if he discloses to the customer concerned or to any
third party the fact that information about known or reasonably suspected
money laundering has been disclosed to an MLRO or NCA, or that a money
laundering investigation is being, or may be, carried out.
In other words, a person who knows or suspects that a protected or authorised
disclosure has been made, and then makes a disclosure of that fact which is likely
to prejudice an investigation which might flow from the disclosure made, is
guilty of tipping-off unless:
(i)
he did not know or suspect that the disclosure was likely to be prejudicial
to that putative investigation;
(ii)
the disclosure was made in carrying out a function relating to the
Section 330(5)
Section 330(5A)
23 Section 330(1)-(4)
21
22
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enforcement of the PCA or any enactment relating to criminal conduct or
the benefit derived from it;
(iii)
the person is a professional legal advisor and the disclosure is not made
with the intention of furthering a criminal purpose and was to (or to a
representative of) a client of the professional legal advisor in connection
with the giving of legal advice to the client or to any person connected
with legal proceedings or contemplated legal proceedings. 24
Legal professional privilege is discussed in more detail below.
SOME KEY CASE LAW
When does property become criminal property?
“In our view, the natural meaning of section 327(1) of the 2002 Act is that the property
concealed, disguised, converted or transferred, as the case may be, must be criminal
property at the time it is concealed, disguised, converted or transferred (as the case may
be). Put the other way round, in a case of transfer, if the property is not criminal property at
the time of the transfer, the offence is not committed.”
R v L, G, Q & M (Loizeau) [2005] 2 Cr App R 618, para. 30
“…the natural and ordinary meaning of section 328(1) is that the arrangement to which
it refers must be one which relates to property which is criminal property at the time
when the arrangement begins to operate on it.”
R v Geary [2011] 1 Cr App R 73, para. 19
“The short point in this appeal is this: is property criminal property for the purposes of
section 328 only after some other offence has been committed, or is it to be characterised
as criminal property because of the criminal objective which the arrangements were
designed to achieve?”
and
“The definition does not embrace property which the accused intends to acquire by
criminal conduct and the language of the statute is not capable of construing the
definition in that way. Property is not criminal property because the wrongdoer intends
that it should be so.”
R v Amir, R v Akhtar [2011] EWCA Crim 146, paras. 13 and 20
Example: D buys drugs paying with money from his wages. The cash is
criminal property in the hands of the dealer, but D’s intention to buy drugs
with the money does not make it “criminal property” in his hands.
24
Section 333(2)-(4)
13
At what point is a money laundering offence committed and by whom?
“A person does not commit an offence if he deals with property that he believes or
suspects represents another person’s proceeds of criminal conduct, when in fact it does
not.”
R v. Montila [2004] 1 WLR 3141, HL
14
Arrangements: failure to disclose in privileged circumstances and the conduct of
litigation by professionals
In Bowman v. Fels25 the Court of Appeal was required to consider the extent of
the involvement of the legal profession in potential money laundering offences
under Section 328 and legal professional privilege. This is a key judgment for
lawyers, and hence the facts and rulings are set out in some detail here.
Background facts
During the course of a domestic dispute between the claimant and defendant, the
claimant’s solicitor came into possession of documents resulting from the
defendant’s disclosure in civil proceedings which suggested to the solicitor that
the defendant had included the cost of works which he had carried out to his
domestic residence within his business accounts and his VAT returns, even
though the residence was unconnected with the business.
The claimant’s solicitor notified the National Criminal Intelligence Service (the
forerunner to NCA) because the solicitor believed that s.328 POCA obliged him
not only to make this disclosure but also not to tell either his client or the
defendant’s solicitors that he had done so. His problems were increased by the
fact that the trial of the dispute was about to take place and he therefore felt
obliged to apply ex parte to the judge for an order vacating the trial date as an
officer of NCIS had told him that it was unlikely that consent would be granted
before the trial was due to start. The judge granted the application and reserved
all future applications to himself.
The defendant’s solicitors were then told that the trial had been vacated but not
the basis for the order being made and they duly applied to set the order aside
and for a direction that the claimant’s solicitors must disclose the basis of their
application and the evidence relied on in support. Another judge heard the
application to set aside and he made an order discharging the earlier order and
directing that the action be re-listed for trial. That latter order was the subject of
appeal to the Court of Appeal.
25
[2005] 2 Cr. App. R. 19, CA (Civ.)
15
The decision of the Court
In his judgment, Brooke L.J. neatly encapsulated the difficulty which POCA can
cause for solicitors acting in cases where criminal activity is suspected:
“The issue at the heart of this appeal is …. an issue of public law of very great
importance that is causing very great difficulties in solicitors’ offices and
barristers’ chambers and in the orderly conduct of contested litigation through
the country. The language of s.328 has caused great uncertainty within the
legal profession, particularly because Parliament has given a much wider
meaning to the phrases “criminal conduct” and “criminal property” than was
required by the relevant EU Directive. Since the Act came into force, lawyers
have become concerned that this section may mean that they themselves are
exposed to the threat of criminal sanctions if they do not make “an authorised
disclosure” of any information which leads them to know or suspect that their
client – or some other person, often the opposing party in family proceedings –
is involved in the acquisition, retention, use or control of property derived from
criminal conduct, however minor”
In view of this difficulty the Court of Appeal was anxious to continue hearing the
appeal, notwithstanding that the substantive dispute between the claimant and
the defendant had been resolved before the appeal came on for hearing.
The Court examined closely the provisions of the 2001 Directive, including
Recitals, and interpreted the provisions of POCA, in particular s.328, accordingly.
The principal issue before the Court of Appeal was whether a solicitor, handling
the ordinary conduct of legal proceedings on behalf of a client, could be said to
be participating in an “arrangement which …..facilitates the acquisition , retention, use
or control of criminal property” giving rise to an obligation of disclosure to the
authorities. The Court of Appeal accepted that these words were capable of a
wide interpretation, such that a solicitor would be under a duty to disclose
“criminal activity” during the course of legal proceedings if he suspected such
activity had occurred. However, Brooke L.J. felt that such a wide interpretation
would undermine two basic human rights, namely access to justice through legal
proceedings and access to legal advice on a private and confidential basis. That
being the case, he concluded that Parliament could not have intended that s.328
interfered with these basic rights. Accordingly the Court of Appeal adopted a
narrow construction of s.328 and ruled that:
16
“... the proper interpretation of s.328 is that it is not intended to cover or affect the
ordinary course of litigation by legal professionals. That includes any step taken
by them in litigation from the issue of proceedings and the securing of injunctive
relief or a freezing order up to its final disposal by judgment”.
Indeed the Law Society has provided guidance which suggests that the judgment
goes wider than that, in that it includes preparatory stages (including pre-action),
different forms of dispute resolution and actions taken or settlement negotiations
undertaken in contemplation of legal proceedings.
The Court of Appeal came to a similar conclusion in relation to the need to
preserve the right to legal professional privilege. It went further and considered
whether or not s.328 overrode the implied undertaking given on disclosure of
documents by one party in adversarial litigation and not read in open court.
Under the CPR, the party to whom such documents have been disclosed will be
committing a contempt of court if he discloses them to a third party without the
express or implied permission of the Court. It concluded that:
“it would require much clearer language than is contained in section 328
….before a parliamentary intention could be gleaned to the effect that a
party’s solicitor is obliged, in breach of this implied duty to the Court, and in
breach of the duty of confidence he owes to his client as his litigation solicitor,
to disclose to NCIS a suspicion that he may have that documents disclosed
under compulsion by the other party evidence one of the matters referred to in
s.328”.
The Court of Appeal did not, however, accept the even narrower construction
put forward by counsel for the Bar Council, namely that s.328 required there to
be some common purpose between the solicitor and his client in facilitating the
acquisition, retention, use or control of criminal property before disclosure was
necessary.
Having concluded that a legal professional conducting legal proceedings
through to their conclusion does not fall within the meaning of an “arrangement”
for the purposes of s.328 which requires disclosure, the Court considered
17
whether the consensual resolution of a dispute in a litigious context falls within
the section. Again the Court concluded that consensual resolution of disputes is
an integral part of the conduct of ordinary litigation, accordingly s.328 was not
intended to cover settlement terms reached in proceedings.
Thus the Court in Bowman v Fels held that in the context of legal proceedings,
s.328 did not apply so as to require the legal adviser to disclose to NCIS (now
NCA) any suspicion that may have developed during the course of the
proceedings regarding the source of any of the assets on the basis of information
learned during the course of the legal proceedings.
After proceedings have been concluded however, the situation alters. While the
solicitor is not obliged to make a disclosure in relation to the settlement, even
where it involves money being paid from the “criminal” source, if the client then
instructs him on a new matter in respect of which the settlement monies are to be
used (e.g. to acquire property), the consent of NCA is required and disclosure
should be made, because by acting for the client in the new transaction, he is
facilitating the use of criminal property under s.328.
Although the decision in Bowman v Fels is helpful in defining the approach to
material and matters coming to the legal advisor’s attention during the course of
litigation, those engaged in non-litigious transactional arrangements may commit
a money laundering offence if they proceed with the transaction without making
a disclosure.
The application of the Directive was considered by the European Court of Justice
in the case of Ordre des Barreaux Francophones et Germanophones and others, in 2007
in which it was held that legal professional privilege is expressly preserved by
Art 6(3) of the First Directive (91/308/EEC) which exempts lawyers from the
obligation to disclose facts indicative of money laundering where information is
received from the client in connection with institution, defending or avoiding
26
judicial proceedings. It does not apply in relation to other activities identified in
the Directive in respect of which a legal adviser has an obligation to report a
suspicious transaction.
26
Ordre des barreaux francophones et germanophones v. Conseil des Ministres (Conseil des barreaux de
l’Union europeénne and Ordre des avocats du barreau de Liège, interveners) (Case C-305/05), The Times,
July 2, 2007
18
19
THE ‘INIQUITY’ EXCEPTION TO LPP
The ‘iniquity’ exception (sometimes called the ‘fraud exception’), finds its
modern origin in R v Cox and Railton (1884) 14 QBD 153, and was summarised by
Longmore LJ in Kuwait Airways (No. 6) [2005] EWHC 367 (COMM); [2005] 1 WLR
2734 (CA) at [14] as being that if a person consults a solicitor in furtherance of a
criminal purpose then, whether or not the solicitor knowingly assists in the
furtherance of such purpose, the communications between the client (or his
agent) and the solicitor do not attract legal professional privilege.
In JSC Bank v Ablyazov27 the claimant bank (J) sought the disclosure from the
first and second respondents (X and S) of documents relating to their assets
which would attract legal professional privilege unless falling within the iniquity
exception to such privilege, and which were currently held by the third to fifth
respondents (Y), being their solicitors or former solicitors.
A number of actions had been brought by J against X and others alleging that
they had defrauded it of more than US$6 billion. J had unenforced judgments of
over US$4 billion. S was X's brother-in-law, through whom X held beneficial
interests in a large number of companies. J sought the disclosure of documents
held by Y with a view to enforcing its judgments, asserting that legal professional
privilege did not apply because of the iniquity exception.
Held: Application granted.
(1)
The touchstone for legal professional privilege was whether the
communication was made for the purposes of giving or receiving legal advice, or
for the purposes of the conduct of actual or contemplated litigation, where the
solicitor was acting in the ordinary course of the professional engagement of a
solicitor. If the iniquity put the advice or conduct outside the normal scope of
such professional engagement, or rendered it an abuse of the relationship, a
communication for such a purpose would not attract legal professional privilege.
In cases where a lawyer was engaged to put forward a false case supported by
false evidence, it would be a question of fact and degree whether it involved an
abuse of the ordinary professional engagement of a solicitor in the circumstances
in question. In the ordinary run of criminal cases a solicitor would be acting in
27
[2014] EWHC 2788 (COMM)
20
the ordinary course of professional engagement even where the defendant put
forward what the jury found to be a bogus defence. But where in civil
proceedings there was deception of the solicitors in order to use them as an
instrument to perpetrate a substantial fraud on the other party and the court, that
could well be indicative of a lack of confidentiality which was the essential
prerequisite for the attachment of legal professional privilege. The deception of
the solicitors, and therefore the abuse of the normal solicitor/client relationship,
would often be the hallmark of iniquity which negated the privilege. That was
consistent with the rights under the European Convention on Human Rights and
the European jurisprudence in relation to lawyer/client privilege.
(2)
The evidence established a very strong prima facie case that from the
moment A engaged Y he was bent on a strategy of concealment and deceit in
relation to his assets which would involve perjury, forgery and contempt as and
when necessary. There was a strong inference that advice was sought in order to
assist in fashioning and pursuing such a strategy. The strategy was pursued
throughout the litigation and when the other two firms were engaged. In relation
to that strategy the solicitors were not being employed in the ordinary course of
professional engagement. It was an abuse of the normal relationship between
solicitor and client to engage them unwittingly to pursue such a strategy. There
was no confidence in communications between solicitor and client by which a
client sought to further such a strategy whilst trying to keep the solicitor in the
dark about it.
(3)
Where a communication had two purposes, one iniquitous and one a
legitimate purpose which would attract legal professional privilege, no privilege
would attach. Privilege would attach if the dominant purpose was conduct of
litigation independently of any iniquity.
SOME CAUTIONARY TALES:
R v. Duff [2003] 1 Cr. App. R. (S) 88
A solicitor (D) practised as a sole principal with salaried partners: most of the
practice's work was conveyancing and personal injury litigation. One of D's
clients in relation to litigation was arrested in possession of cocaine worth about
£5 million.
D was instructed to act for the client and initially for his co-
defendant. Subsequently it was alleged that the client and his co-defendant had
21
undertaken a large number of trips out of the United Kingdom for drug
trafficking purposes. D at this stage began to have doubts about his client's
innocence. D had been given £60,000 in cash about one year before the client's
arrest: £50,000 of this was paid by the client as an investment. The client asked
for the return of this money and it was duly returned. The following month the
client paid £10,000 into a company set up by D to solicit business for his practice.
This business was unsuccessful and became dormant.
Over a year later, D
became aware that the transactions might have been for the purpose of money
laundering but he reached the conclusion that he was not subject to a duty of
disclosure. The client and his co-defendant were subsequently convicted of drug
trafficking. D then took advice from another firm of solicitors and was advised
that he had not been under a duty to report the payments. He was subsequently
arrested and pleaded guilty to two counts of failing to disclose knowledge or
suspicion of money laundering under the Drug Trafficking Act 1994. Thereafter
he was sentenced to six months’ imprisonment, which was upheld on appeal.
The Court of Appeal noted that D was a man of previously good character and
that his practice had collapsed as a result of the case, but found that in a case of
this kind, even where a solicitor had been drawn unwittingly into this type of
offence, it was important to look at the underlying facts. D received £70,000 in
cash in the space of one month. He became concerned about the matter over a
year later. The money had been put in part into fictitious names. He did not
seek advice for a further six months. He was not entirely co-operative when
arrested. The Court said that money laundering is a serious matter and breaches
of the legislation by professional people could not be overlooked; hence this was
clearly a case where a custodial sentence was warranted.
R v. Griffiths and Pattison [2007] 1 Cr. App. R. (S) 95
Two drug dealers pleaded guilty to offences and while awaiting sentence and
confiscation proceedings, sought to dispose of a house which was valued at
£150,000. The first drug dealer offered to sell the house to P for the value of the
outstanding mortgage, and P approached G (a solicitor) with a view to effecting
the conveyance. G knew enough about local prices to appreciate that the house
was substantially undervalued.
G carried out the transaction for a normal
conveyancing fee.
22
P was convicted of entering into a money laundering arrangement, contrary to
section 328 of POCA 2002 and acquiring criminal property, contrary to section
329.
G was jointly charged with P on the s.328 count but was acquitted.
However, he was convicted of the ‘reporting’ offence [s.330]. Given his acquittal
on the more serious charge, the prosecution accepted that the offence was
committed by G on the basis that he had reasonable grounds for knowing or
suspecting money laundering and not that he did in fact know or suspect money
laundering.
G’s sentence of 15 months’ imprisonment was reduced to six months by the
Court of Appeal.
Again however the Court noted the consequences of his
conviction, that he was acquitted of the more serious offences, and that he had
not made any great profit; but held that solicitors are the “doorkeepers of
financial probity” in connection with the legislation and an immediate custodial
sentence was appropriate.
R v. Swan and another [2012] 1 Cr. App. R. (S) 90
S pleaded guilty to seven charges of failing to disclose money-laundering under
s.330 after she was employed by the second appellant, who ran a safe deposit
company with premises at three separate locations. Undercover police officers,
purporting to act as clients, made a series of suspicious currency conversions
amounting to about £54,000 in cash, using the bureau de change operated by S.
One officer also rented a safe deposit box in which he stored large quantities of
cash in high denomination euro notes.
S pleaded guilty to failing to disclose money-laundering in relation to her
dealings with the undercover police officers and also the opening of a number of
safe deposit boxes, on the basis that although she did not actually know or
suspect that the undercover officers and holders of the boxes were engaged in
money-laundering, she had reasonable grounds to suspect that that was the case.
Her sentence of 12 months’ imprisonment on each count concurrent was reduced
by the Court of Appeal to nine months to better reflect full credit for her early
plea of guilty, but noting that S played an important day-to-day role in the
second appellant’s business and was well placed to notice suspicious behaviour
and report it to the authorities.
23
The Court reviewed the approach to sentencing for a s.330 offence, including
Duff and Griffiths and Pattison. If it was important that professional people such
as solicitors complied scrupulously with the legislation, it must be just as
important that those whose business was to operate facilities which by their very
nature provided opportunities for money-laundering did the same. S accepted
by her plea that she had reasonable grounds for suspecting that the undercover
officers were engaged in money laundering and that in each charge relating to
the boxes which were opened and there were suspicious circumstances of the
kind that should have been disclosed. If the Court were dealing with an isolated
failure to comply with the requirements of the Act, a lower starting point might
have been appropriate, but it followed from the fact that she pleaded guilty to
seven separate charges that her failures were persistent and continued over a
period of time.
THE MONEY LAUNDERING REGULATIONS 2007
The 2007 Money Laundering Regulations came into force on 15th December 2007
and reflect the UK response to the 3rd Money Laundering EU Directive28;
although in some respects, the standards demanded by the Regulations are more
stringent than some of the requirements under the Directive. 29 The 2007
Regulations replace and revoke the 2003 Regulations.
The main purpose of the Third Directive is to provide a common EU basis for
implementing the revised Recommendations on Money Laundering issued by
The Financial Action Task Force )“FATF”) in June 2003. It also takes account of
the new risks and practices that have developed since the previous Directive.
Are You In The Regulated Sector?
Application of the Regulations
Throughout the Regulations reference is made to a “relevant person”, which
means anyone to whom the Regulations apply by virtue of Regulations 3 and 4.
Directive 2005/60/EC
The Financial Action Task Force [FATF] has said “the UK’s anti-money laundering system is an
impressive one ... which meets, and in many areas goes beyond the forty recommendations.”
28
29
24
The Regulations apply to the following persons acting in the course of business
carried on by them in the UK (“relevant persons”):30
(1) A business is in the regulated sector to the extent that it consists of—
(a) the acceptance by a credit institution of deposits or other repayable funds from
the public, or the granting by a credit institution of credits for its own account;
(b) the carrying on of one or more of the activities listed in points 2 to 12, 14 and 15 of
Annex 1 to the Capital Requirements Regulation by an undertaking other than—
(i) a credit institution; or
(ii) an undertaking whose only listed activity is trading for own account in one
or more of the products listed in point 7 of Annex 1 to the Capital
Requirements Regulation and which does not act on behalf of a customer
(that is, a third party which is not a member of the same group as the
undertaking);
(c) the carrying on of activities covered by the Solvency 2 Directive by an insurance
company authorised in accordance with that Directive;
(d) the provision of investment services or the performance of investment activities
by a person (other than a person falling within Article 2 of the Markets in
Financial Instruments Directive) whose regular occupation or business is the
provision to other persons of an investment service or the performance of an
investment activity on a professional basis;
(e) the marketing or other offering of units or shares by a collective investment
undertaking;
(f) the activities of an insurance intermediary as defined in Article 2(5) of the
Insurance Mediation Directive, other than a tied insurance intermediary as
mentioned in Article 2(7) of that Directive, in respect of contracts of long-term
insurance within the meaning given by article 3(1) of, and Part II of Schedule 1 to,
the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;
(g) the carrying on of any of the activities mentioned in paragraphs (b) to (f) by a
branch located in an EEA State of a person referred to in those paragraphs (or of
an equivalent person in any other State), wherever its head office is located;
(h) the activities of the National Savings Bank;
(i) any activity carried on for the purpose of raising money authorised to be raised
under the National Loans Act 1968 under the auspices of the Director of Savings;
(j) the carrying on of statutory audit work within the meaning of section 1210 of
the Companies Act 2006 (meaning of “statutory auditor” etc) by any firm or
individual who is a statutory auditor within the meaning of Part 42 of that Act
(statutory auditors);
(k) the activities of a person appointed to act as an insolvency practitioner within the
meaning of section 388 of the Insolvency Act 1986 (meaning of “act as insolvency
practitioner”) or article 3 of the Insolvency (Northern Ireland) Order 1989;
(l) the provision to other persons of accountancy services by a firm or sole
practitioner who by way of business provides such services to other persons;
30
By Reg.3
25
(m) the provision of advice about the tax affairs of other persons by a firm or sole
practitioner who by way of business provides advice about the tax affairs of other
persons;
(n) the participation in financial or real property transactions concerning—
(i) the buying and selling of real property (or, in Scotland, heritable property) or
business entities;
(ii) the managing of client money, securities or other assets;
(iii) the opening or management of bank, savings or securities accounts;
(iv) the organisation of contributions necessary for the creation, operation or
management of companies; or
(v) the creation, operation or management of trusts, companies or similar
structures,
by a firm or sole practitioner who by way of business provides legal or notarial
services to other persons;
(o) the provision to other persons by way of business by a firm or sole practitioner of
any of the services mentioned in sub-paragraph (4);
(p) the carrying on of estate agency work by a firm or a sole practitioner who carries
on, or whose employees carry on, such work;
(q) the trading in goods (including dealing as an auctioneer) whenever a transaction
involves the receipt of a payment or payments in cash of at least 15,000 euros in
total, whether the transaction is executed in a single operation or in several
operations which appear to be linked, by a firm or sole trader who by way of
business trades in goods;
(r) operating a casino under a casino operating licence (within the meaning given
by section 65(2) of the Gambling Act 2005 (nature of licence));
(s) the auctioning by an auction platform of two-day spot or five-day futures, within
the meanings given by Article 3 of the Emission Allowance Auctioning
Regulation;
(t) bidding directly, on behalf of clients, in auctions of emissions allowances in
accordance with the Emission Allowance Auctioning Regulation.
Independent Legal Professional
The term includes a firm or sole practitioner who by way of business provides
legal or notarial services to other people, when participating in financial or real
property transactions concerning:
a.
the buying and selling of real property or business entities;
b.
the managing of client money, security or other assets;
26
c.
the opening or management of bank, savings or securities accounts;
d.
the organisation of contributions necessary for the creation, operation or
management of companies; or
e.
the creation, operation or management of trusts, companies or similar
structures; and for this purpose, a person participates in a transaction by
assisting in the planning or execution of the transaction or otherwise acting
for or on behalf of a client in the transaction.
The European Court of Justice has confirmed that this list is intended to be
exhaustive31. In a test case taken to the ECJ by the professional body of Belgian
lawyers, the Court pointed out that Article 6 of the ECHR was concerned with
the concept of a “fair trial”, which included elements such as rights of the
defence, equality of arms and a right of access to lawyers, amongst others. These
rights would be compromised if lawyers were obliged to pass information to the
authorities that they obtained in the course of legal consultations. The Court
went on to state that Article 2a(5) of Directive 91/30832 makes it clear that the
obligations in respect of information and co-operation apply to lawyers:
“33. ……..only insofar as they advise their client in the preparation or execution of
certain transactions—essentially those of a financial nature or concerning real
estate, as referred to in Art.2a(5)(a) of that directive—or when they act on
behalf of and for their client in any financial or real estate transaction. As a rule,
the nature of such activities is such that they take place in a context with no link
to judicial proceedings and, consequently, those activities fall outside the scope
of the right to a fair trial.
34.
Moreover, as soon as the lawyer acting in connection with a transaction as
referred to in Art.2a(5) of Directive 91/308 is called upon for assistance in
defending the client or in representing him or her before the courts, or for
advice as to the manner of instituting or avoiding judicial proceedings, that
lawyer is exempt, by virtue of the second sub-paragraph of Art.6(3) of the
directive, from the obligations laid down in Art.6(1) , regardless of whether the
information has been received or obtained before, during or after the
proceedings. An exemption of that kind safeguards the right of the client to a
fair trial.”
Ordre des Barreaux Francophones et Germanophone and others v. Conseil des Ministres (Conseil des
Barreaux de l'union Europeenne and another, Intervening) Case C-305/05 [2007] 3 C.M.L.R. 28, [2007]
All E.R. (EC) 953
32 The Second Directive (2001)
31
27
Limitations on the impact of the Regulations on lawyers in the regulated sector
The effect of Bowman v Fels is that lawyers acting in the regulated sector will not
be bound by the Regulations in the course of contentious litigation or the
consensual resolution of litigation. Transactional work remains subject to the
Regulations.
28