Strengthening the compliance
function for banks and insurers
Strengthening internal governance for banks and insurers is an issue for
European and Dutch bank and insurance supervisory authorities. Some risks
may only be properly addressed through governance requirements rather than
through the quantitative requirements reflected in the Capital Requirements
Directive (CRD IV) for banks or the Solvency Capital Requirement
(Solvency II) for insurers. An effective system of governance is therefore
essential for the adequate management of the bank or insurance undertaking
and for the regulatory system.[1]
In this article we will examine the legal framework and based on this
framework and our experience with Dutch compliance issues, we will discuss
how to work out the new role and tasks of banks’ and insurers’ compliance
function and compliance officers in the letter and spirit of Solvency II.
Compliance function
For Solvency II a function is:
September 2015
Issue 18.7
EUROPE ....................................... 1
Jurgen Borst and Professor Rob Schotsman
analyse the role, requirements and individual
skillsets of the regulatory compliance function
in Dutch banks and insurance organisations.
INTERNATIONAL ........................ 7
Isfandiyar Aghayev details the Republic of
Azerbaijan’s anti-bribery regime, and how
it can be applied in other jurisdictions that
comply with international legislation on
bribery and corruption.
UK/UAE ......................................10
Dr Waleed Alhosani provides a comparative
analysis of legal and practical risks in
submitting suspicious activity reports on
money laundering, focusing on the current
regimes in the UK and UAE.
“… an administrative capacity to undertake particular governance tasks. The
identification of a particular function does not prevent the undertaking from freely
deciding how to organise that function in practice save where otherwise specified in
this Directive. This should not lead to unduly burdensome requirements because
account should be taken of the nature, scale and complexity of the operations of the
undertaking. It should therefore be possible for those functions to be staffed by own
staff, to rely on advice from outside experts or to be outsourced to experts within the
limits set by this Directive.”[2]
So it is possible to outsource the compliance function. Some banks and insurers
in the Netherlands outsource because they are too small to have a compliance
officer. It is very important that whoever fulfils the compliance function is able
to give advice and challenge the banks’ or insurers’ managing and supervisory
board on compliance issues, for instance, related to strategy. Of course, the
managing board remains responsible for the outsourced activities based on
written policies and ensures that compliance policies are implemented.[3]
Furthermore, as regards the internal audit function, “… in smaller and less
complex undertakings it should be possible for more than one function to be
carried out by a single person or organisational unit.”[4]
Also in some large Dutch banks and insurance companies, we see that
the compliance and risk management functions are carried out by a single
organisational unit. After all, these functions complement each other. This
happens in a way which ensures that each function is free from influences
that may compromise its ability to undertake its duties in an objective, fair and
independent manner.[5] This means, for example, that risk and compliance
has to keep its own independent reporting and escalation line to the bank or
insurer’s managing and supervisory board in cases of disagreement in reporting
(compliance) risks. All key functions explicitly mentioned in Solvency II have
to be operationally independent. Furthermore Solvency II is in favour of
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Financial Regulation International · September 2015 · Issue 18.7
close cooperation between the key functions. At the very
least, a periodic key functions meeting is desirable to have
a clear and unified position supported by all governance
functions.
Finally for Solvency II, the functions included in the
system of governance are considered to be key functions
and consequently important and critical functions.[6]
For that reason: “All persons that perform key functions
should be fit and proper. However, only the key function holders
should be subject to notification requirements to the supervisory
authority.”[7]
Legal framework
The Solvency II directive norms are principle-based
whereas the commission delegated regulation Solvency II
works out these norms in a more rule-based manner.
To understand the new role and tasks of compliance
officers under Solvency II we must also consider the
International Standards Boards’ views on compliance.
For insurers the International Association of Insurance
Supervisors (IAIS) is important, especially its document
entitled: Insurance core principles, standards, guidance and
assessment methodology. The system of governance
guidelines of EIOPA completes the legal framework on
the compliance function norms.
Directive
First let us have a closer look to the Solvency II norms in
the directive.
Article 42 on the fit and proper requirements for
persons who effectively run the undertaking or have
other key functions, states that:
“Insurance and reinsurance undertakings shall ensure that
all persons who effectively run the undertaking or have other key
functions at all times fulfil the following requirements:
(a) their professional qualifications, knowledge and experience
are adequate to enable sound and prudent management (fit);
and
(b) they are of good repute and integrity (proper).”
Commission delegated regulation
This principle-based Solvency II fit and proper norm
is worked out in detail by the commission delegated
regulation.
Article 273 of the commission delegated regulation
includes:
“1. Insurance and reinsurance undertakings shall establish,
implement and maintain documented policies and
adequate procedures to ensure that all persons who
effectively run the undertaking or have other key
functions are at all times fit and proper within the
meaning of art 42 of Directive 2009/138/EC.
2. The assessment of whether a person is fit shall include
an assessment of the person’s professional and formal
qualifications, knowledge and relevant experience within the
insurance sector, other financial sectors or other businesses
and shall take into account the respective duties allocated
2
to that person and, where relevant, the insurance, financial,
accounting, actuarial and management skills of the person.
3. The assessment of whether members of the administrative,
management or supervisory body are fit shall take account
of the respective duties allocated to individual members to
ensure appropriate diversity of qualifications, knowledge
and relevant experience to ensure that the undertaking is
managed and overseen in a professional manner.
4. The assessment of whether a person is proper shall include
an assessment of that person’s honesty and financial
soundness based on evidence regarding their character,
personal behaviour and business conduct including any
criminal, financial and supervisory aspects relevant for the
purposes of the assessment.”
Guideline number 13 of the EIOPA Final Report on
Public Consultation No. 14/017 on Guidelines on system of
governance states:
“The undertaking should have a policy on the fit and proper
requirements, which includes at least:
a) description of the procedure for identifying the positions for
which notifying is required and for the notification to the
supervisory authority;
b) description of the procedure for assessing the fitness and propriety
of the persons who effectively run the undertaking or have other
key functions, both when being considered for the specific position
and on an on-going basis;
c) description of the situations that give rise to a re-assessment
of the fit and proper requirements;
d) description of the procedure for assessing the skills, knowledge,
expertise and personal integrity of other relevant personnel
not subject to the requirements of art 42 of Solvency II
according to internal standards, both when being considered
for the specific position and on an on-going basis.”
Compliance officers’ new tasks
How to prove the compliance officer is at all times fit and proper –
which policies and procedures are required, and what does it mean
by ‘relevant experience’?
To answer these questions first let us have a closer
look at the tasks compliance officers must fulfil based on
the Solvency II directive and the commission delegated
regulation Solvency II.
According to the Solvency II directive art 46 (2):
“The compliance function shall include advising the
administrative, management or supervisory body on compliance
with the laws, regulations and administrative provisions
adopted pursuant to this Directive. It shall also include an
assessment of the possible impact of any changes in the legal
environment on the operations of the undertaking concerned
and the identification and assessment of compliance risk.”
The commission delegated regulation Solvency II art 270
states:
“1. The compliance function of insurance and reinsurance
undertakings shall establish a compliance policy and a
compliance plan. The compliance policy shall define the
www.financialregulationintl.com
responsibilities, competencies and reporting duties of the
compliance function.The compliance plan shall set out the
planned activities of the compliance function which take
into account all relevant areas of the activities of insurance
and reinsurance undertakings and their exposure to
compliance risk.
2. The duties of the compliance function shall include assessing
the adequacy of the measures adopted by the insurance or
reinsurance undertaking to prevent non-compliance.”
•
•
•
For the commission delegated regulation Solvency II,
cooperation between the functions is very important.The
commission emphasises in art 268:
“Insurance and reinsurance undertakings shall incorporate
the functions and the associated reporting lines into the
organisational structure in a way which ensures that each
function is free from influences that may compromise the
function’s ability to undertake its duties in an objective, fair
and independent manner. Each function shall operate under
the ultimate responsibility of, and report to the administrative,
management or supervisory body and shall, where appropriate,
cooperate with the other functions in carrying out their roles.”’
The EIOPA Guidelines on systems of governance also
emphasise cooperation. For EIOPA, compliance and
strategy must be aligned. Based on guideline 1.28, the
insurer must “...align all policies required as part of the
system of governance with each other and with its business
strategy. Each policy should clearly set out at least:
a) the goals pursued by the policy;
b) the tasks to be performed and the person or role responsible
for them;
c) the processes and reporting procedures to be applied; and
d) the obligation of the relevant organisational units to inform
the risk management, internal audit and the compliance and
actuarial functions of any facts relevant for the performance of
their duties.”’
Furthermore IAIS Insurance core principles, standards, guidance
and assessment methodology includes in guideline 8.4:
“(that) the insurer (…) have an effective compliance function
capable of assisting the insurer to meet its legal and regulatory
obligations and promote and sustain a corporate culture of
compliance and integrity.”
IAIS continues and states:
“The compliance function should establish, implement and
maintain appropriate mechanisms and activities to:
•
•
promote and sustain an ethical corporate culture that values
responsible conduct and compliance with internal and external
obligations; this includes communicating and holding training
on an appropriate code of conduct or similar that incorporates
the corporate values of the insurer, aims to promote a high
level of professional conduct and sets out the key conduct
expectations of employees;
identify, assess, report on and address key legal and regulatory
obligations, including obligations to the insurer’s supervisor,
•
•
and the risks associated therewith; such analyses should use
risk and other appropriate methodologies;
ensure the insurer monitors and has appropriate policies,
processes and controls in respect of key areas of legal,
regulatory and ethical obligation;
hold regular training on key legal and regulatory obligations
particularly for employees in positions of high responsibility
or who are involved in high risk activities;
facilitate the confidential reporting by employees of concerns,
shortcomings or potential or actual violations in respect of
insurer internal policies, legal or regulatory obligations,
or ethical considerations; this includes ensuring there are
appropriate means for such reporting;
address compliance shortcomings and violations, including
ensuring that adequate disciplinary actions are taken where
appropriate and any necessary reporting to the supervisor or
other authorities is made; and
conduct regular assessments of the compliance function and
the compliance systems and implement or monitor needed
improvements.”
Compliance officers, new tasks summarised
Based on the regulatory requirements detailed above,
compliance officers’ new tasks are:
– to establish a compliancy policy and plan;
– to cooperate with the other functions to align
compliance and strategy;
– to advise executives, managers and members of the
supervisory board on compliance with the laws,
regulations and administrative provisions;
– to perform impact analyses of new regulations for the
activities of the company;
– to assess the adequacy of the measures to prevent noncompliance;
– to promote and sustain a corporate culture of
compliance and integrity;
– to train on regulation for employees;
– to facilitate the confidential reporting of concerns or
shortcomings to fulfil regulations.
Controlling and monitoring
Solvency II is still about control.The compliance function
in Solvency II is part of the internal control function
whereas, in our opinion, the compliance function is more
a monitoring function. To control means to check if the
business complies with the regulations. Monitoring,
on the other hand, is to investigate if the business
understands the regulations and how to comply with
them, and assess the adequacy of the measures adopted by
the insurer to prevent non-compliance. So monitoring is
more on distance than controlling.
New compliance tasks on culture, behaviour
and strategy
The following two compliance officer’s tasks mentioned
in Solvency II are new and very important for Dutch
banks and insurers.
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Financial Regulation International · September 2015 · Issue 18.7
The first is to promote and sustain a corporate culture
of compliance and integrity. Traditionally the compliance
officer’s task was to supervise employees’ compliance with
the regulations. However, Dutch compliance officers now
also have an important role in promoting and sustaining
a corporate culture of compliance and integrity because
non-compliance is based on behaviours which lack
integrity.
The second is to cooperate with other functions to
align compliance and strategy. We have also seen that the
Dutch compliance officer is more of a ‘sparring partner’
of business. The compliance officer’s new tasks are to
advise and challenge the strategy based on an impact
analysis of new regulations. It means the compliance
officer must co-operate more effectively with businesses
and with members of the banks’ or insurers’ managing
and supervisory boards.
Compliance officers permanent education system
worked out
To fulfil this new task compliance officers must be fit at
all times. To prove this, the bank or insurer must design
a permanent education system for its compliance
officers.
IAIS Insurance core principles, standards, guidance and
assessment methodology states in principle 8.2.20:
“Persons who perform control functions should possess
the necessary experience, skills and knowledge required for
the specific position they exercise and meet any applicable
professional qualifications. Higher expectations apply to the
head of each control function. To ensure that persons who
perform control functions remain up to date on the developments
and techniques related to their areas of responsibility, they
should receive regular training relevant to their field and areas
of responsibilities.”
In its Final Report on Public Consultation No. 14/017
EIOPA states:
“2.42. The undertaking has to assess the fitness and
propriety as set out in these Guidelines regarding
all persons who effectively run the undertaking as
well as all persons carrying out a key function. In
addition, when the undertaking is appointing an
individual to be responsible for a key function or
to effectively run the undertaking, they formally
notify the supervisory authority and provide the
information needed to assess whether the individual
is fit and proper.
2.43. The fitness assessment is not limited to the moment
of employment but includes arranging for further
professional training as necessary, so that staff is also
able to meet changing or increasing requirements of their
particular responsibilities.”
In our opinion based on the tasks compliance officers
have to fulfil, the following are important permanent
education principles:
4
-
-
-
-
understanding of (European and National) financial
law in order to establish a compliance policy and
impact analysis;
understanding the activities of the bank or insurer
in order to make impact analyses regarding new
regulations;
understanding coaching techniques and how people
learn in order to train them effectively;
understanding culture and behaviour in order to
promote and sustain a corporate culture of compliance
and integrity;
understanding the differing views of other key
functions and the world of managing and supervisory
board members in order to advise them on regulatory
compliance.
How to fulfil these tasks?
Solvency II states that compliance officers have to be
independent; cooperate with other key functions; and act
with authority (also fit and proper).
Independence means the compliance officer
“….should be able to carry out the related duties objectively
and free from influence and to report relevant findings
directly to the administrative, management or supervisory
body.” [8]
In cooperation, meanwhile, means “…..each function
shall operate under the ultimate responsibility of, and report
to the administrative, management or supervisory body and
shall, where appropriate, cooperate with the other functions in
carrying out their roles.”[9]
Finally, compliance officers “….shall have the necessary
authority, resources and expertise as well as unrestricted
access to all relevant information necessary to carry out their
responsibilities.”[10]
Compliance policy elements
For Solvency II a written compliance policy, which
includes the elements detailed below, is very important.
Compliance function
According to the Basel Committee on Banking
Supervision: “An independent function that identifies,
assesses, advises, monitors and reports on the Bank’s compliance
risk, that is, the risk of legal or regulatory sanctions, financial
loss, or loss to reputation a bank may suffer as a result of its
failure to comply with all applicable laws, regulations, codes of
conduct and standards of good practice (together laws, rules and
standards.”[11]
Compliance risk
The Basel Committee on Banking Supervision has adopted
the following definition, also mentioned above: “The risk
of legal or regulatory sanctions, material financial loss, or loss to
reputation a bank may suffer as a result of its failure to comply
with laws, regulations, rules, related self-regulatory organization
standards, and codes of conduct applicable to its banking activities
(together, ‘compliance laws, rules and standards’).”
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Proportionality
-
The compliance function is adapted to the nature, size,
risk and complexity of the bank or insurer.
-
Scope
In cooperation with compliance, the bank or insurer
determines the relevant laws and regulations the
compliance function will monitor. Close liaison takes
place with other relevant departments such as HR,
Legal, Finance, and IT. Other key features, such as
security, are based on risk analysis, available resources and
proportionality.
Governance and compliance functions
Governance includes:
(1) the content of the compliance policy and the
responsibility of the management board;
(2) the content of the periodical review by the compliance
function;
(3) the bodies to which the compliance function reports
(in accordance with the reporting lines of the risk
management function to the management board);
and
(4) the responsibility and status of the head of the
compliance function.
-
-
Role separation
Separation is necessary not only between the first and
second line, but also between the second and third
line. The compliance function should not fulfil audit
functions.
“All key functions explicitly mentioned in Solvency II have to
be operationally independent. This means key functions have
to retain the responsibility for taking the decisions necessary
for the proper performance of their duties without interference
from others. This requires that the functions are integrated into
the organisational structure in a way that ensures that there
is no undue influence, control or constraint exercised on the
functions with respect to the performance of their duties and
responsibilities by other operational or key functions, senior
management or the AMSB”.[12]
The responsibilities, powers and reporting tasks of the
compliance function are set out within the compliance
policy framework.
Independent
The compliance function should be independent and
free from pressure, and separate from other operational
business units.
In order to be independent, a control function must
satisfy the following conditions:
a. employees in a position to provide independent
control do not perform monitoring tasks;
b. auditing is separated from the activities that should be
monitored and controlled;
c. a suitable representative (not responsible for
management and monitoring of the framework)
should be selected from the control function, to
report to the management body, and attend relevant
committees and meetings; and
d. the remuneration of staff in a control function should
not be linked to the operation of activities being
monitored and controlled by the control function,
which could undermine his or her objectivity.
The compliance function is independent of the first and
third line and is separate from the daily scheduled activities.
The compliance officer has no tasks or responsibilities
within the first line. The independence and objectivity of
the compliance function are guaranteed by the following
measures:
the chairman of the supervisory board shall review the
compliance function annually;
the legal status of the compliance officer under
labour law is protected by the granting of a legal
status such as that which applies to members of the
works council;
the compliance officer shall be appointed and
dismissed by the member of the managing board with
compliance in the portfolio;
the compliance officer has a direct reporting line and
unimpeded access to the management board as well as
to the chairmen of the audit and risk committees, and
is present at relevant meetings.
Internal regulator
The supervisory board sees to the functioning of the
board. The supervisory board has an important role in
monitoring the functioning of the risk management
system. Compliance risks are an important part of
controlled risks. The compliance function must
periodically meet the chairman of the supervisory board
to discuss the main compliance risks and compliance
status. Compliance reports are discussed by the audit and
risk committees.
Escalation line
The compliance function may, where necessary, apply
directly to the chairman of the supervisory board.
Cooperation
The compliance function works with other key functions
(risk, actuarial and audit).
Compliance works closely with various other
(supporting) functions and divisions such as: corporate
support, security matters, information security,
confidential counsellors, human resources and legal affairs.
The compliance function is involved in the following
forums and committees:
•
•
•
audit committee;
risk committee;
compensation committee;
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Financial Regulation International · September 2015 · Issue 18.7
•
•
•
•
•
•
PARP-Commission;
reputation committee;
fraud committee;
know your customer-commission;
credit committee/intermediate committees; and
SII/CRD IV committees.
relevant for the exercise of the compliance function.
Also, according to EIOPA: “the obligation of the relevant
organisational units to inform the risk management, internal
audit, compliance and actuarial functions of any facts relevant for
the performance of their duties”.[13] Compliance has access
to all the data it needs.
Awareness
Reporting incidents
The compliance function ensures that employees are
familiar with relevant (incoming) laws and (internal)
regulation. The compliance function recommends a
proactive board on relevant new or updated laws and
regulations, and related compliance risks. The bank
or insurer has a process that ensures that new laws
and regulations are signaled and implemented in a
timely manner. The compliance function is involved in
promoting compliance with relevant rules with advice,
policy, awareness raising and monitoring. Examples
include newsletters (in collaboration with the legal
department), training programmes and presentations.
The compliance function must report incidents to the
competent authority.
Access to management
The compliance officer has direct access to the executive
director and members of the executive board.
External contacts
The compliance officer represents the bank or insurer
in (formal) contact time with regulators and supervisors.
This shall be without prejudice to the position of statutory
final responsibility, as compared to regulators and other
authorities.
Advice
The compliance function advises the first line with regard
to controlling compliance risks.
Monitoring
Checking compliance with legislative and internal rules,
including reviewing the measures taken by the insurance
or reinsurance undertaking, to prevent non-compliance.
Expertise (fit)
Individuals appointed to the compliance function must
have sufficient expertise. Their professional qualifications,
knowledge and experience are adequate to enable sound
and prudent management (fit). A permanent education
programme should be in place.
Reliability (proper)
Report
The compliance function reports periodically on
its monitoring findings to the highest management
(administration). For example, reports are discussed by the
audit and risk committee (including supervisory board
members and administrators).
Evaluation
The AMSB must complete regular reviews of the
governance system. The internal audit function’s ongoing
reporting can provide input into these.
Code of conduct drafting
The board adopts a code of conduct or takes other
appropriate means to commit the bank or insurer to
compliance with applicable laws, regulations, supervisory
decisions, and internal policies, thereby conducting
business ethically and responsibly.
Compliance can develop various integrity schemes,
such as a code of conduct, which can be adopted by the
board.
Conflict of interest, whistleblowing, precognition and
gifts should also be covered.
Information
The board and line management are responsible for
the timely informing of the compliance function. It is
6
People with key functions must be of good repute and
integrity (proper). From the time of appointment and
throughout performance, measures must be in place to
ensure reliability.
Reward
Employees in control functions are independent of the
business units where they have sufficient authority to
exercise supervision, and should be rewarded against the
objectives their function is focused on, independent of
the results of the operations they monitor. The reward of
personnel at a control function should not linked to the
operation of activities to be monitored and controlled
from the control function, or otherwise undermine
their objectivity.[14] The compliance function should be
involved in the establishment of the remuneration policy
of the company.
Facilitation
The compliance function should be equipped with
enough authority, resource and powers. This will also
depend on the type of bank or insurer (size, complexity),
task and scope of the compliance function.
Conclusion
Traditionally, the compliance officer’s task was to supervise
employee compliance with regulatory requirements.
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However, they now play an important role in promoting
and sustaining a corporate culture of compliance and
integrity, because non-compliance is based on human,
‘non-integrity’ behaviour. The compliance officer
must cooperate with other business functions to align
compliance and strategy. They are essentially a sparring
partner for the business. The new tasks are to advise on,
and to challenge, the strategy of the company based on
an impact analysis of new regulations on the activities of
a bank or insurer. It means the compliance officer must
have more and better cooperation with the business,
and members of the banks’ or insurers’ managing and
supervisory boards. To fulfil these new tasks, compliance
officers must be fit at all times, assisted by a permanent
education programme.
Finally, to execute the new tasks efficiently, the
compliance officer needs a written compliance policy
formalising this new role.
Mr. Jurgen Borst, Concern Compliance
Coöperatie Univé U.A. [email protected]
Officer,
Prof. Dr. Rob Schotsman, University of Amsterdam.
[email protected]
Endnotes
1. Basel Committee on Banking Supervision, Compliance and
the compliance function in banks, April 2005: http://www.
bis.org/bcbs/and http://www.bis.org/publ/bcbs113.htm.
2. Consideration 31 of the Solvency II Directive 2009/138.
3. Article 41 (3) Solvency II Directive 2009/138.
4. Consideration 32 of the Solvency II Directive 2009/138.
5. Commission delegated regulations Solvency II 2015/35
art. 268.
6. Consideration 33 of the Solvency II Directive 2009/138.
7. Consideration 34 of the Solvency II Directive 2009/138.
8. Consideration 99 the commission delegated regulation
Solvency II.
9. Article 273 the commission delegated regulation
Solvency II.
10. Article 268 the commission delegated regulation
Solvency II.
11. See BCBS, Compliance and the Compliance Function in
banks.
12. EIOPA, Final Report on Public Consultation No. 14/017
on Guidelines on system of governance, 2.12, p. 46).
13. Final Report on Public Consultation No. 14/017 on
Guidelines on system of governance, guideline 7, p. 48).
14. GL 44 and article 275 Commission Delegated Regulation
(EU) 2015/35).
Fighting bribery in the Republic of Azerbaijan
This paper analyses bribery in the context of legislation
in the Republic of Azerbaijan, however the concept
in principle can be applied to any state that complies
with international legislation related to bribery and
corruption. The paper provides definitions of key terms,
ie bribe taking (passive bribery) and bribe giving (active
bribery); exertion of improper influence on the decisionmaking of public officials (trading in influence); describes
subjects, objects, subjective aspects of bribery and forms
and types of offences; analyses the qualifying criteria
constituting crime; and compares local legislation with
international law, particularly the Criminal Code of the
Republic of Azerbaijan, the United Nations Convention
against Corruption, the Criminal Law Convention on
Corruption by the Council of Europe.The author analyses
bribery from a number of angles providing the reader
with an all-round view of the various aspects this crime.
The paper will be of interest to both academics and law
practitioners, as well as public officials from governmental
and local authorities, business owners and managers of
NGOs and other organisations willing to understand,
anticipate and manage bribery-related activities.
Bribery is deemed to be a corruption crime.The object
of corruption can vary in nature but predominantly is
limited to socially important valuables and interests,
which define the objectives, tasks and activities of public
officials from governmental and local authorities, as well
as the private sector and NGOs. In the majority of cases,
this includes legitimacy, validity and effectiveness of
operations and administration of law – in other words,
due performance of duties by public officials. This means
acting in accordance with respective principles of ethics
and moral values. Thus, officials from governmental
organisations, local authorities, private companies and
NGOs should be acting in accordance with the interests
of the individual, the society and the state. It is the
significant violation of such interests that defines the
social danger of bribery. Actions of the representatives of
public authorities performed in violation of the interests
of such organisations discredit the state as a whole or its
separate departments and undermine trust of the general
public. Bribe-related activities not only reflect badly upon
the performance of governmental organisations, local
authorities, private companies and NGOs but also attract
organised crime, illegal armed groups aiming to trigger
national or religious conflicts, war-related crime and
crime against humanity.
There are two types of bribery – bribery taking
(passive bribery) and bribery giving (active bribery). The
two make a peculiar formation that is called bribery, or an
illegal non-gratuitous deal between any person and any
of its public officials aiming to solve a problem taking
into account their own interests or the interests of the
organisation they are representing. Of course, in principle
either one of the above can be present independently
without the other. For example, bribe taking can
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Financial Regulation International · September 2015 · Issue 18.7
take place under circumstances eliminating criminal
responsibility of the bribe taker, especially if he or she
voluntarily informs respective authorities. Similarly, the
official who is offered a bribe can choose to expose the
bribe giver to the relevant authorities instead of accepting
the bribe. Nevertheless, the process is usually driven by
both parties leading to an illegal deal between a bribe
giver and a bribe taker, or a combined set of activities
stipulated in arts 311 and 312 of the Criminal Code of
the Republic of Azerbaijan.
Bribery is one of the most dangerous forms of
corruption. It leads to perversion of social justice,
and undermines performance of the governmental
organisations that is intended to protect the rights and
legal interests of (along with the individual, the society
and the state) and discredits the state. Bribery is dangerous
due to the severe consequences of the actions of the
officials accepting the bribe.
The direct object of bribery-related crime is focused
around the interests of the representatives of governmental
and local authorities, private companies and NGOs.
Bribe giving (passive bribery)
(Article 311 of the Criminal Code of the Republic of Azerbaijan)
The objective aspect of crime consists of a public
official demanding or receiving, directly or indirectly,
tangible assets or other valuables, privileges or benefits for
him or her or third parties in return for which the above
official agrees to perform or not perform their official
duties.
Bribe taking (passive bribery) is deemed to be felony in
accordance with art 15 of the United Nations Convention
against Corruption dated 31 October 2003.
Thus, paragraph B of art 15 of the above convention
defines bribery as a process of extortion or acceptance
by a public official, directly or indirectly, of an undue
advantage either for him or her or a third party, be it a
legal entity or an individual, whereby the above public
official agrees to perform or not perform a specific action
whilst carrying out their duties.
Article 311 of the Criminal Code of the Republic
of Azerbaijan states that the object of receiving a bribe
includes tangible assets, other valuables, privileges and
benefits.
Tangible assets and other valuables include money,
securities, other property, proprietary privileges, etc.
According to art 311 of the Criminal Code of the
Republic of Azerbaijan, money can be represented by any
convertible currency. Securities are documents attesting
proprietary rights that can be exercised or transferred only
upon their presentation. Other property is viewed as any
tangible effects that have a commodity value. Proprietary
privileges are described as receipt of paid services for
free, or at an intentionally reduced price. For example,
provision of flight or train tickets, holiday and recuperation
packages, payment of medical treatments, construction
8
works and repairs, etc. Privileges are advantages in relation
to acquisition of any rights, use of works or services, etc.
For example, priority delivery of services, provision of
accommodation, or a company car at the expense of the
governmental or other organisation. Benefits are described
as full or partial exemption from a particular duty or duties.
This can be reflected in reduction of the price for goods,
provision of services, exemption from debt, etc.
Bribes can be handed over by any person to the public
official (himself or herself ) or their relatives, but upon his
or her knowledge and consent.The bribe can be presented
either by the bribe giver directly or indirectly.
The handover of the bribe can be either open or
disguised. Particularly, in reality it is becoming more and
more popular to receive a bribe in the form of a fee,
bonus, privileged property sale, etc. One of the concealed
forms of a bribe is valuable presents, for example, from the
companies holding talks with the public official.
However, one should be aware of the risk of an
objective opinion leading to unethical, but not criminally
liable, behaviour of a senior official accepting valuable
presents from subordinates on account of an anniversary,
award, etc., although some instances of such behaviour
can be classified as abuse of office.
The crime in question is deemed committed upon
receipt of a part of the bribe. The subjective aspect of this
crime is characterised by direct intent. The subject is a
public official.
The above article lists and describes qualifying and
critically qualifying criteria significantly increasing
responsibility. As per pt 2 of art 311 of the Criminal Code
of the Republic of Azerbaijan, qualifying criteria include
acceptance by a public official of a bribe in return for
agreeing to perform or not perform a particular action.
Critically qualifying criteria include acceptance of a
bribe accompanied by one or more of the following
circumstances:
•
•
•
•
in collusion by a group of people;
by an organised group;
on a large scale; and
based on extortion.
Some of the above criteria have been discussed
previously. Therefore, definitions are required only in
the instance of bribery on a large scale and bribery
based on extortion. Large scale is stipulated in art 311
of the Criminal Code of the Republic of Azerbaijan
as an amount of money or value of securities or other
property that is higher than 5,000 Azerbaijani Manats
which at the time of writing this paper in June 2015 was
an equivalent of £3,000.
In this instance, extortion means a direct demand by
a public official for a bribe accompanied by a threat to
not satisfy a rightful request or even violate the rights
and interests of the other party, their relatives and the
organisations they are representing.
www.financialregulationintl.com
Bribe giving (active bribery)
(Article 312 of the Criminal Code of the Republic of
Azerbaijan)
The objective aspect of crime consists of providing the
public official, directly or indirectly, with tangible effects
or other valuables, privileges or benefits for the public
official himself or herself or third parties in return for
agreeing to act or refrain from acting in the exercise of
his or her functions.
As per para A of art 15 of the United Nations
Convention against Corruption dated 31 October 2003,
bribe giving (active bribery), or bribe taking (passive
bribery) is defined as promising, giving or offering of an
undue advantage by any person, directly or indirectly, to
any of its public officials or a third party, be it a legal
entity or an individual, whereby the public official agrees
to act or refrain from acting in the exercise of his or her
functions.
This crime is deemed committed upon acceptance of
a part of the bribe by the official.
A party giving the bribe upon request of a third
party can be prosecuted only if they are aware that they
are committing bribery. If they have been informed
that, for example, they are paying a debt, fulfilling a
friend’s assignment, etc., they cannot be considered an
accomplice.
The subjective aspect of the crime is characterised by
direct intent.The subject is a sane individual aged 16 years
or older.
According to pt 2 of art 312 of the Criminal Code
of the Republic of Azerbaijan, qualifying criteria for the
above crime include giving a bribe by any person to any
of its public officials in return for his or her consent to
perform or not perform a specific action. An example is
giving a bribe to a police officer in return for release of an
individual caught in the act.
It should be noted that the list of qualifying criteria
can be extended. It would also be desirable to increase
responsibility in the instances of proactive initiatives
leading to coerce a public official to accept the bribe.Thus,
this qualifying criterion could be deemed as symmetrical
in relation to extortion as stated in para 4 of art 3 of the
Criminal Code of the Republic of Azerbaijan.
To facilitate the fight against bribery, the footnote
to art 312 of the Criminal Code of the Republic of
Azerbaijan provides for exemption from criminal
responsibility for the bribe giver should extortion take
place or if the party voluntarily informs respective
authorities entitled to initiate criminal proceedings.
Notably, the motive driving the bribe giver doesn’t
affect their exemption from liability. It is necessary
and sufficient for the party to voluntarily report the
instance of bribe giving before they are summoned for
examination and as long as they don’t know that the
law enforcement authorities are aware of the instance
of bribery. Article 296 of the Criminal Code of the
Republic of Azerbaijan states that law enforcement
authorities are recommended to verify authenticity of
reported information should it be provided voluntarily.
In criminal law, bribery is closely linked to responsibility
for crime associated with exertion of improper influence
on decision-making of public officials as sometimes it can
be deemed as bribery-related crime.
Exertion of improper influence on the decisionmaking of public officials (trading in influence)
(Article 312-1 of the Criminal Code of the Republic of
Azerbaijan)
The above article lists criminal responsibility for two
separate instances of crime. The first one for extortion or
acceptance of tangible effects or other valuables, privileges
or benefits; the second one for provision of the above.
Paragraphs 6 and 7 of art 9 of the Act of the Republic
of Azerbaijan cts or other valuables, dated 13 January
2004 state that both of the above crimes are classified
by international legal acts as trading in influence and are
deemed related to corruption.
The immediate object of crimes listed in art 312-1
of the Republic of Azerbaijan is focused around the
interests of the representatives of governmental and local
authorities, private companies and NGOs.
The objective aspect of crime stipulated in pt 1 of
art 312-1 of the Criminal Code of the Republic of
Azerbaijan consists of extortion or acceptance by a public
official of tangible assets or other valuables, privileges or
benefits for himself or herself or third parties in return
for agreeing to abuse their actual or supposed power to
exert improper influence on the decision-making of a
public official.
The objective aspect of the crime listed in pt 2 of art
312-1 of the Criminal Code of the Republic of Azerbaijan
consists of giving the official tangible assets and other
valuables, privileges and benefits in return for agreeing to
abuse their actual or supposed power to exert improper
influence on the decision-making of a public official.
Article 18 Financial Code of the United Nations
Convention against Corruption dated 31 October 2003
provides definitions for both forms of trading in influence.
Thus, crime listed in pt 1 of art 312-1 of the Republic of
Azerbaijan, is described in para B of art 18 of the above
convention as an extortion or acceptance by a public
official or any other individual, directly or indirectly,
of an undue advantage for himself or herself or a third
party in return for agreeing to abuse his or her actual or
supposed power to receive an undue advantage from the
governmental or public authorities of the participating
state. Crime listed in pt 2 of art 312-1 of the Criminal
Code of the Republic of Azerbaijan is described in para
A of art 18 of the above convention as promising, giving
or offering to a public official or any other individual,
directly or indirectly, of an undue advantage in return for
their agreeing to abuse their actual or supposed power
to receive an undue advantage from the governmental or
public authorities of the participating state.
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Financial Regulation International · September 2015 · Issue 18.7
The above convention was ratified in the Republic of
Azerbaijan by Milli Majlis on 30 September 2005.
The Criminal Law Convention on Corruption adopted
by the Council of Europe on 27 January 1999 also has a
provision for the problem in question in a separate article
called ‘Trading in influence’ (art 12).This article states that
each party shall adopt such legislative and other measures
as may be necessary to establish as criminal offences
under its domestic law, when committed intentionally, the
promising, giving or offering, directly or indirectly, of any
undue advantage to anyone who asserts or confirms that
he or she is able to exert an improper influence over the
decision making of:
•
•
•
•
•
any person who is a member of any domestic public
assembly exercising legislative or administrative
powers;
a public official of any other state;
any official or other contracted employee of any
public international or supranational organisation or
body of which the party is a member;
any members of parliamentary assemblies of
international or supranational organisations of which
the party is a member;
any holders of judicial office or officials of any
international court whose jurisdiction is accepted by
the party
in consideration of whether the undue advantage is for
himself or herself or for anyone else, as well as the request,
receipt or the acceptance of the offer or the promise of
such an advantage, in consideration of that influence,
whether or not the influence is exerted or whether or not
the supposed influence leads to the intended result.
The Criminal Law Convention on Corruption
adopted by the Council of Europe on 27 January 1999
was ratified in the Republic of Azerbaijan by Milli Majlis
on 30 December 2003.
Crimes stipulated in art 312-1 of the Criminal Code
of the Republic of Azerbaijan, are deemed committed
upon receipt by the party of a part of the tangible assets
or other valuables, privileges and benefits.
The subjective aspect of both crimes is characterised
by direct intent. A mandatory criterion constituting crime
is a specific objective – exertion of improper influence on
the decision making of public officials.
Subjects of the discussed crimes can vary. In the first
instance (pt 1 of art 312-1 of the Republic of Azerbaijan)
the subject can be a member of the family, relative, friend,
superior colleague of the public official highly respected
in the country, region, community, etc., and in the second
instance, any sane individual aged 16 years or older.
Conclusion
Bribery is an omnipresent phenomenon that cannot
be eradicated. However, understanding its complex
nature, anticipating its development and recognising
associated risks can help public officials from
governmental and local authorities, business owners
and managers of NGOs and other organisations
identify and manage bribery-related activities. In
some instances, bribe givers and bribe takers might
not even be aware of the implications of the crime
they are about to commit but it doesn’t exempt them
from criminal liability should they be caught.
Moving forward, it would be useful to conduct research
in bribery in a relatively new area, for example, in sporting
contests, particularly in the wake of the recent arrests of
FIFA officials. This would be valuable for two reasons:
1) sporting events are supported by million dollar
contracts and therefore present an exceptionally
appealing subject to the general public, including
tournament organisers, sports marketing companies
and broadcasting companies;
2) sporting events tend to attract more and more general
public, so the findings of such research would help
outsiders understand the nature of the business and
make a better judgement of the legitimacy of the
game itself.
Isfandiyar Aghayev, Associate Professor, Criminal Law and
Criminology Department, Baku State University.
Bibliography
1. Criminal Code of the Republic of Azerbaijan, 14 July
2000
2. United Nations Convention against Corruption, 31
October 2003
3. Criminal Law Convention on Corruption by the
Council of Europe, 27 January 1999
Legal and practical risks of submitting SARs on ML–
A comparative analysis of the UK and UAE regimes
The 2012 Financial Action Task Force (FATF)
Recommendation 29 provides that a Financial
Intelligence Unit (FIU) is a national agency that specialises
in receiving, analysing and disseminating information on
10
suspicious activities reports (SARs), which are received
from reporting entities. A SAR contains information on a
specific, suspicious transaction or activity related to money
laundering (ML) or proceeds from criminal activities.
www.financialregulationintl.com
FATF Recommendation 29 provides that:
“Countries should establish a financial intelligence unit (FIU)
that serves as a national centre for the receipt and analysis of:
(a) suspicious transaction reports; and (b) other information
relevant to money laundering, associated predicate offences and
terrorist financing, and for the dissemination of the results of
that analysis. The FIU should be able to obtain additional
information from reporting entities, and should have access
on a timely basis to the financial, administrative and law
enforcement information that it requires to undertake its
functions properly.”
This means that all financial institutions and other
reporting entities in a country are obliged to submit
SARs on ML to the national FIU. However, the question
arises what is the legal basis for submitting a SAR to a
FIU? Is it objective, subjective or both?
This article critically evaluates the legal basis for
submitting a SAR on ML to a FIU. It assesses whether
the basis is objective, subjective or both from three
perspectives, namely 1) international standards, 2) the UK
legal system and 3) the United Arab Emirates (UAE) legal
system. More importantly, this article analyses the notion
of ‘suspicion’ as a legal basis to submit a SAR and the
recent judicial interpretation of it in the case of Shah v
HSBC Private Bank (UK) Ltd[1] in the UK.
This article critically assesses the seriousness of
submitting SARs on mere suspicion, especially in light of
the aforementioned, inconsistent judicial interpretation,
and the practical and legal consequences that emanate from
such an interpretation. Indeed, such serious consequences
are not confined to a particular country, but are a common
phenomenon in countries all over the world. This article
argues that the term ‘suspicion’ must be removed as the
legal basis for submitting SARs and it provides legal and
practical justifications for this argument.
Submitting SARs from the perspective of
international standards
The SARs regime is the most important mechanism of
the anti-money laundering (AML) system.This is because
it allows the FIU, which is the only authorised entity
to receive SARs, to identify whether the transaction
or activity actually relates to ML and to determine the
next step. The FATF Recommendations adopt the SARs
regime in cases where there is ‘suspicion’ or ‘reasonable
grounds for suspicion’ that a transaction/activity relates
to ML or terrorist financing (TF).[2] Hence, banks and
other financial institutions are under an obligation to
promptly inform the FIU when they suspect or have
reasonable grounds to suspect that a transaction/activity
relates to ML.[3]
Hence, the FATF recommendations leave the basis of
submitting SARs up to national legislation.The basis could
be subjective, objective or both. Nevertheless, submitting
SARs on mere suspicion has serious consequences, as is
analysed below.
The situation in the UK
The legal basis of the SARs is the second group of ML
offences, which are contained in pt 7 of the Proceeds of
Crime Act 2002 (POCA 2002), namely the three offences
of failing to report. These offences occur when there is a
failure to report or disclose specific information/matters
– on ML – to the relevant authority.
This group of offences consists of three types, as follows:
a) The crime of regulated sector employees failing to
report.
S. 330(1)-(4) of the POCA 2002 provides that:
“(1) A person commits an offence if the conditions in
subsections (2) to (4) are satisfied
(2) The first condition is that he
(a) knows or suspects, or
(b) has reasonable grounds for knowing or suspecting,
that another person is engaged in money laundering.
(3) The second condition is that the information or other
matter
(a) on which his knowledge or suspicion is based, or
(b) which gives reasonable grounds for such knowledge
or suspicion, came to him in the course of a business
in the regulated sector.
(3A) The third condition is
(a) that he can identify the other person mentioned
in subsection (2) or the whereabouts of any of the
laundered property, or
(b) that he believes, or it is reasonable to expect him
to believe, that the information or other matter
mentioned in subsection (3) will or may assist in
identifying that other person or the whereabouts of
any of the laundered property.
(4) The fourth condition is that he does not make the
required disclosure to
(a) a nominated officer, or
(b) a person authorised for the purposes of this Part by
the Director General of the National Crime Agency,
as soon as is practicable after the information or
other matter mentioned in subsection (3) comes to
him.”
b) The crime of regulated sector nominated officers
failing to report.
S.331 (1)-(4) of the POCA provides that:
“(1) A person nominated to receive disclosures under s 330
commits an offence if the conditions in subsections (2) to
(4) are satisfied (2) The first condition is that he
(a) knows or suspects, or
(b) has reasonable grounds for knowing or suspecting,
that another person is engaged in money laundering.
(3) The second condition is that the information or other
matter
(a) on which his knowledge or suspicion is based, or
(b) which gives reasonable grounds for such knowledge
or suspicion,
came to him in consequence of a disclosure made under s 330.
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Financial Regulation International · September 2015 · Issue 18.7
(3A) The third condition is
(a) that he knows the identity of the other person
mentioned in subsection (2), or the whereabouts
of any of the laundered property, as a result of a
disclosure made under s 330,
(b) that that other person, or the whereabouts of any of the
laundered property, can be identified from the information or other matter mentioned in subsection (3), or
(c) that he believes, or it is reasonable to expect him to
believe, that the information or other matter will or
may assist in identifying that other person or the
whereabouts of any of the laundered property.
(4) The fourth condition is that he does not make the required
disclosure to a person authorised for the purposes of this
Part by the Director General of the National Crime
Agency as soon as is practicable after the information or
other matter mentioned in subsection (3) comes to him.”
c) The crime of other nominated officers failing to
report.
S.332 (1)-(4) of the POCA 2002 provides that:
“(1) A person nominated to receive disclosures under ss 337
or 338 commits an offence if the conditions in subsections
(2) to (4) are satisfied.
(2) The first condition is that he knows or suspects that
another person is engaged in money laundering.
(3) The second condition is that the information or other
matter on which his knowledge or suspicion is based
came to him in consequence of a protected disclosure or
authorised disclosure.
(3A) The third condition is
(a) that he knows the identity of the other person
mentioned in subsection (2), or the whereabouts of
any of the laundered property, in consequence of a
[protected disclosure or authorised disclosure],
(b) that that other person, or the whereabouts of any of
the laundered property, can be identified from the
information or other matter mentioned in subsection
(3), or
(c) that he believes, or it is reasonable to expect him to
believe, that the information or other matter will or
may assist in identifying that other person or the
whereabouts of any of the laundered property.
(4) The fourth condition is that he does not make the required
disclosure to a person authorised for the purposes of this
Part by the Director General of the National Crime
Agency as soon as is practicable after the information or
other matter mentioned in subsection (3) comes to him.”
Before focusing on the basis of these three crimes, it is
important to mention that the common feature is that they
are not just related to failing to disclose actual ML activities,
but also, failing to disclose possible ML activities.[4]
The common condition for the first and second offence
of failing to report
The common feature between the first and second type
of criminal offence is that they solely apply to employees
12
who work in the ‘regulated sector’ and both of them can
be committed on a mere negligence basis.[5] Sch 9(1)
of the POCA 2002 defines businesses in the regulated
sector and excluded activities. Businesses in the regulated
sector comprise all businesses in the financial sector,
such as banks and also estate agents, tax advisers, auditors
and lawyers.
This means that it is sufficient to prove that a
person who works in the regulated sector, has failed
to report, had suspicion/knowledge or there were
reasonable grounds for suspicion/knowledge for any of
these two offences to be committed.[6] Hence, for the
purpose of establishing the first and second offences of
failing to report, it is enough to prove the existence
of a reasonable cause for suspicion. In Ahmad v HM
Advocate,[7] the court mentioned that to prove the
existence of reasonable grounds for suspicion and that a
person in the regulated sector should have divulged to
the Serious Organised Crime Agency (SOCA), which
is now the National Crime Agency (NCA) due to
the Crime and Courts Act 2013 (CCA 2013), solely
requires that the prosecution establishes the offence
of failing to disclose. This is regardless of whether the
money constitutes the proceeds of the defendant or
another person’s illegal act.
In contrast, the third offence of failing to report
does not show a clear and direct relationship with these
offences. This is due to two reasons. First, the offence
catches any person who works as a nominated officer,
irrespective of whether he is in the regulated sector or
outside it,[8] so long as he receives internal disclosures
or SARs from another person in that firm, which causes
him to suspect/know that another person is involved in
ML and he fails to disclose that suspicion/knowledge to
the NCA.[9] The POCA 2002 uses the term ‘nominated
officer’ and the Financial Conduct Authority (FCA) uses
the term ‘money laundering reporting officer’ (MLRO).
A nominated officer/MLRO is equal to a compliance
officer in the UAE. Secondly, unlike the first two failings
to report offences, which deal with just one type of
SAR, namely ‘required disclosure,’ the subject of such
an offence has two types of SAR, namely ‘protected
disclosure’ and ‘authorised disclosure’.[10] Therefore, a
nominated officer who is outside the regulated sector
will not deal with the required disclosure, simply because
his organisation falls outside the sector. Thus, he is not
be obliged to adhere to the type of disclosure under the
first offence of failing to report,[11] namely s 330 of
POCA 2002.
Generally, the conditions for the third offence of
failure to report are similar to the conditions for the
second failure to report offence, except that ‘reasonable
grounds for knowledge or suspicion’ are not required.
Therefore, this crime cannot be committed on a mere
negligence basis, which means that an objective test
is not required for the purpose of establishing this
offence. This may be because the offence applies to all
www.financialregulationintl.com
nominated officers who work inside and outside the
regulated sector.[12] The requirement of an objective
test may be helpful in establishing the conditions of
an offence, since a nominated officer should adhere
to the highest level of customer due diligence (CDD)
when dealing with clients’ transactions for the purpose
of detecting or preventing ML. A nominated officer is
assumed to possess greater experience on ML activities
and patterns than other people in his organisation.
Hence, even if a nominated officer is outside the
regulated sector, as long as he receives internal SARs
from another person in that firm, the same ought to
apply to him.
Failing to report a crime can have massive consequences
for those working in the financial sector, as well as
professionals,[13] as analysed below. The question is what
is the basis for this?
Subjective or objective basis
The condition of failing to report offences requires
that anyone who works in or outside the regulated
sector could be committing these crimes if he ‘knows’,
‘suspects’ or if there are ‘reasonable grounds’ to know or
suspect that another person is engaged in ML.[14] This
means that either a subjective basis for knowledge or
suspicion or an objective basis for reasonable grounds
for knowledge or suspicion is applied. Nevertheless,
the subjective basis, especially mere suspicion, raises
a number of dilemmas in relation to the offences of
failing to report. This is because the POCA 2002 does
not require that a suspicion be based on reasonable
grounds.[15] This means that mere suspicion is enough
to meet the condition.
Obviously, knowledge in this context means actual
knowledge generally, namely that the person had actual
knowledge that the proceeds emanated from criminal
conduct, For example, when a customer physically
deposits cash into his bank account and admits in the
course of his conversation with a banker that this cash
is the result of drug trafficking. In this case, the banker
has actual knowledge that this cash constitutes criminal
property since it emanates from criminal conduct.
Thus, in this case, the banker has to submit a SAR on
ML. However, ‘constructive knowledge’[16] is also
sufficient.[17]
Suspicion means the possibility
Suspicion is the central, mental ingredient for the three
principal ML offences, which is a subjective and personal
threshold.[18] There is no definition for suspicion in the
POCA 2002. However, in R v Da Silva,[19] Longmore
L.J. in the Criminal Division of the Court of Appeal
explained 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. But
the statute does not require the suspicion to be ‘clear’ or
‘firmly grounded and targeted on specific facts’ or based upon
‘reasonable grounds.’ To require the prosecution to satisfy such
criteria as to the strength of the suspicion would, in our view, be
putting a gloss on the section.”[20]
The most important sentence for defining a ‘suspicion’ in
the aforementioned paragraph is “… there is a possibility,
which is more than fanciful, that the relevant facts
exist.”[21] The Court of Appeal in the aforementioned
case has illustrated the meaning of suspicion, which is
contained in s 93A (1)(a) of the Criminal Justice Act
1988.[22] Such an interpretation could be applied to
the offences under POCA 2002. This is what happened
when the Civil Division of the Court of Appeal applied
the interpretation of suspicion in the Da Silva[23] case to
POCA 2002 in K Ltd v NatWest Bank PLC.[24] In fact,
an assessment of whether likelihood is fanciful involves a
value judgment and every case will be different.[25]
Suspicion must be based on specific facts
In a civil context, Lord Scott took a different approach
in relation to suspicion, when he opined in Manifest
Shipping CO Ltd v Uni-Polaris insurance CO Ltd (‘the star
sea’)[26] that:
“Suspicion is a word that can be used to describe a state of
mind that may, at one extreme, be no more than a vague feeling
of unease and, at the other extreme, reflect a firm belief in the
existence of the relevant facts ...the suspicion must be firmly
grounded and targeted on specific facts.”[27]
Indeed, such an approach is not suitable when
interpreting the term suspicion under the POCA 2002.
There are two reasons for this. First, the expression
of ‘vague feeling of unease’ or ‘inkling’ is insufficient
to appreciate the meaning of suspicion under the
POCA 2002.[28] This is because suspicion denotes a
higher degree than inkling or vague feeling of unease.
Therefore, at the trial in Da Silva[29], in order to find
the meaning of suspecting, the judge directed the jury to
the Chambers English Dictionary, which defines suspicion
as “the imagining of something without evidence or on
slender evidence; inkling: mistrust.”[30] Accordingly, the
judge stated that:
“… Any inkling or fleeting thought [that the other person
had engaged in criminal conduct sufficed for the offence].”[31]
In contrast, the Criminal Division of the Court of Appeal
rejected such an approach and stated that:
“The judge could not, in our judgment, have been criticised if
he had declined to define the word ‘suspecting’ further than by
saying it was an ordinary English word and the jury should
apply their own understanding of it. Of course, the danger
with saying nothing is that the jury might actually ask for
assistance about its meaning and, if they did, the judge would
have to assist as best he can … Using words such as ‘inkling’
or ‘fleeting thought’ is liable to mislead.”[32]
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Financial Regulation International · September 2015 · Issue 18.7
The Court of Appeal further added that, if the judge felt
it appropriate to assist the jury, he should direct them
that:
“The prosecution must prove that the defendant’s acts
of facilitating another person’s retention or control of the
proceeds of criminal conduct were done by a defendant who
thought that there was a possibility … that the other person
was or had been engaged in or had benefited from criminal
conduct.”[33]
Secondly, the POCA 2002[34] does not require that a
suspicion is reasonable or relates to specific facts for the
purpose of the definition of criminal property. As a result,
in Da Silva,[35] the court stated that:
“This court could not, even if it wished to, imply a word such
as ‘reasonable’ into this statutory provision. To do so would be
to make a material change in the statutory provision for which
there is no warrant.”[36]
Moreover, in the K Ltd[37] case, the Court of Appeal
emphasised that:
“The existence of suspicion is a subjective fact. There is no
legal requirement that there should be reasonable grounds for
the suspicion.”[38]
It seems that the courts in Da Silva[39] and K Ltd[40] have
provided legal and logical reasons to exclude ‘reasonable
grounds’ in the course of interpreting the term suspicion.
This is because requiring reasonable grounds as a reason
for suspicion initially entails a legal basis. Nevertheless,
the POCA 2002 does not grant such a basis. Therefore,
requiring suspicion to be reasonable leads to the inclusion
of this requirement in the statutory provision. However,
in reality, this is not the case.
The proper definition of suspicion
As such, the Court of Appeal in Da Silva[41] appears to
have properly clarified the term suspicion in the context
of POCA 2002, which means that there is a ‘possibility’
that relevant facts exist and that this possibility is more
than fanciful. Certainly, a possibility anticipates that an
event has occurred or is going to occur. However, even
though they do not reach a belief, the anticipation should
be based on some grounds.[42]
The aforementioned approach does not necessarily
conflict with the fact that suspicion has to be settled. For
example, due to his training, a banker may suspect that a
large cash deposit could involve ML activities. However,
such suspicion could be mitigated in case the banker finds
out from the bank’s records that the relevant customer has
a cash-based business.[43]
Nevertheless, the Court of Appeal in Shah v HSBC
Private Bank (UK) Ltd[44] recently adopted a completely
different approach to interpreting suspicion. Below, this
approach will be critically evaluated, along with its
legal implications.
14
Objective basis
An objective basis means that reasonable grounds for
knowing or suspecting ML are enough.[45] This means
that an offence can be committed on the basis of a person,
in the regulated sector, simply not taking into account
the grounds that a reasonable professional ought to have
known or suspected.[46] The justification for this is that
CDD measures are required in the regulated sector under
the AML system.[47] Unlike businesses that are outside
the regulated sector, employees and the nominated
officers who work in the regulated sector have to adhere
to the highest level of CDD when they are dealing with
clients’ transactions.[48] Thus, following training, a person
working in the regulated sector has to pay great attention
to the information that is gained through CDD measures.
This is because this information could inform him that
there are reasonable grounds to know or suspect that
another person/firm is engaged in ML activity.[49]
The case of R v Phillip Griffiths and Leslie Dennis
Pattison[50] clearly illustrates the difference between
knowledge and suspicion, which is a subjective test, and
‘having reasonable grounds for knowledge or suspicion’,
which is an objective test. In this case, the defendant was
acquitted of the principal ML offence, which is based
on knowledge or suspicion. On the other hand, he was
convicted for failing to disclose the ML offence, which
is based on knowledge, suspicion or having reasonable
grounds for the knowledge or suspicion. The Court of
Appeal stated that:
“Most significantly, he [the defendant] was acquitted of the
more serious offences based on knowledge and suspicion and
was convicted of failing to disclose to the authorities when he
had reasonable grounds for knowing or suspecting that this
transaction involved money laundering.”[51]
Another example of the offence is the conviction by
Preston Crown Court in 2007 of two senior managers
at Lloyds TSB. They had failed to report that they
operated an account at their branch for one of their
customers who operated a brothel.[52] Judge Andrew
Blake stated that there was no evidence that they had
actual knowledge about the details of the illegal business
or that they had received any sexual favours in order to
operate the customer’s bank account. Nevertheless, both
senior managers received fines, as they did not report
their suspicion/knowledge or reasonable suspicion/
knowledge that the customer was managing an illegal
business.[53]
In Ahmad (Mohammad) v HM Advocate,[54] the
defendant was the secretary and director of a company
that was trading as Makkah Travel in Glasgow. He was
convicted of failing to disclose his knowledge, suspicion
or reasonable grounds for knowledge or suspicion that
William Anthony Gurie was engaged in ML.[55]
“Namely repeated visits to [him] by William Anthony
Gurie to deposit large, unexplained quantities of cash for
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transmission to a jurisdiction with which he had no legitimate
connection known to [him].”[56]
Although there is no comprehensive guidance about the
notion of ‘reasonable grounds’, there are three fundamental
circumstances that require an MLRO (nominated officer)
to have reasonable grounds to know or suspect. First,
where complex transfers of monies are carried out across
jurisdictions, especially when AML legislation has been
repeatedly disobeyed. For example, transfers that are
carried out through countries on the FATF high-risk
and non-cooperative jurisdictions.[57] On 18 October
2013, the FATF published a public statement identifying
jurisdictions with high-risk and non-cooperative
jurisdictions that pose a risk to the international financial
system. Secondly, where it appears that there is no
economic justification for the money dealings.[58] In
addition, massive cash amounts provide reasonable grounds
to know or suspect ML,[59] particularly if the relevant
customer declined to provide the required information/
documents without any reasonable justification[60] or if
he provided information/documents, but they did not
satisfy the expectation of the relevant employee. Thirdly,
when Offshore Financial Centres’ (OFCs)[61] services are
widely used and the economic needs of the customers
do not appear to necessitate this.[62] An OFC can be
defined as any jurisdiction, which exclusively adopts a
system in order to promote business, legal and financial
infrastructures, including those infrastructures, which
display a higher degree of flexibility for the demands
of foreign investors than traditional infrastructures in
onshore. This means that an OFC is a jurisdiction, which
accommodates an enormous number of financial services
to customers, such as banking and insurance, who are nonresident, compared to the quantity of sourced business at
the domestic level.
It may be worth noting that the terms ‘objective test’,
‘reasonable grounds’ or ‘negligence test’ all denote the
same.[63]
The risk of submitting SARs on mere suspicion
Not only do legal and practical problems arise with the
consent regime but also, with the SARs regime as a whole.
The risk is because a subjective basis, namely suspicion or
knowledge, is enough for submitting all SARs on ML,
including authorised disclosure and protected disclosure.
Where an authorised disclosure is based on a subjective
basis, the first two offences of failing to report are based
on either a subjective basis or objective basis and the third
offence of failing to report is based on a subjective basis.
There is no harm when the SAR is based on actual
knowledge but vagueness arises as mere suspicion is
enough for submitting a SAR and no legal requirement
is contained in the POCA 2002, which requires that the
suspicion must be firmly justified. On the other hand, if
a banker, a nominated officer, suspects that a transaction
involves ML, he is legally obliged to submit his suspicion
on a SAR form to the NCA. Serious consequences can
come from this, especially for the customer’s rights and
reputation or even the bank if it was the reporter. The
case of Squirrell Ltd v National Westminster Bank plc[64]
illustrates this situation. Squirrell Ltd was established in
2002 under another name and traded in mobile phones
and other goods. It opened an account with the National
Westminster Bank plc. In March 2005, the bank froze the
account. Mr Khan, who was the managing director of
the firm, did not receive any explanation or notification
from the bank. The managing director sought to discuss
the reason for this with the bank’s employees but did
not manage to get any information from them. Instead,
he was prevented from accessing the company’s account
and did not receive any notification. As no funds could
be accessed, the company could not instruct a solicitor.
Consequently, the managing director himself had to act
as counsel for the company. The case demonstrates the
serious impact that SARs can have on a customer of a
bank, particularly on one who has no evidence that has
been forwarded to establish a prima facie case or has not
been charged with any particular crime. Laddie J opined
in Squirrell’s[65] case that:
“… [I] should say that I have some sympathy for parties in
Squirrell’s position. It is not proved or indeed alleged that it or
any of its associates has committed any offence. It, like me, has
been shown no evidence raising even a prima facie case that it
or any of its associates has done anything wrong. For all I know
it may be entirely innocent of any wrongdoing.”[66]
The change in judicial interpretation of the
term ‘suspicion’
As analysed above, the Court of Appeal in the case of
Da Silva[67] interpreted this notion and the Court of
Appeal in K Ltd[68] provided that the POCA 2002
does not require that a suspicion has to be based on
reasonable grounds. Nevertheless, recently, in the case of
Shah v HSBC Private Bank (UK) Ltd,[69] the Court of
Appeal interpreted the notion of suspicion differently. In
summary, the facts of the case were that the defendant
bank suspected that the claimant was a money launderer.
Accordingly, the bank submitted a SAR[70] to the SOCA,
now the NCA, requesting consent to proceed with the
claimant’s instructions in relation to a transfer of funds out
of the accounts that he held with them. SOCA granted
consent and the bank carried out the claimant’s transfer
request. The claimant alleged that he lost $331m[71]
in interest as a result of the SAR, which the defendant
bank had made. Moreover, he asked the bank to prove
the reason for its suspicion and argued that the suspicion
was irrational. However, he did not argue that the bank
made the SAR in bad faith. The judge stated that the
only way to challenge these cases is by alleging bad faith.
Accordingly, he rejected the claimant’s allegations. In
contrast, Longmore L.J. in the Civil Division of the Court
of Appeal explained that:
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Financial Regulation International · September 2015 · Issue 18.7
“I cannot see why… Mr Shah cannot require the bank to
prove its case that it had the relevant suspicion and be entitled
to pursue the case to trial so that the bank can make good its
contention in this respect.”[72]
The solicitor of the bank provided details of the
procedures that were used to deal with the suspicions
and these affirmed that a suspicion existed via a witness
statement. However, the Court of Appeal considered the
witness statement insufficient and stated that:
“No reason why the bank should not be required to prove the
important fact of suspicion in the ordinary way at trial by first
making relevant disclosure and then calling either primary or
secondary evidence from relevant witnesses.”[73]
According to the Court of Appeal, the relevant person
or customer has the right to ask for the reasons behind
the suspicion and the defendant bank must divulge the
basis and nature of its suspicion. In other words, if the
suspicion was not based on reasonable grounds or the
defendant failed to prove the grounds, the SAR will be
deemed illegal.[74] Furthermore, if the reporter/bank did
not justify its suspicion, the relevant customer could claim
that the bank breached its contract and claim damages for
any financial loss.[75]
The consequences of the change and
a possible solution
It is not easy to analyse and justify the dramatic change
in the interpretation of the notion of suspicion from
the perspective of the Court of Appeal. The court’s
interpretation exceeds what is required for a suspicion to
be made out. There is no legal requirement in the POCA
2002 that a suspicion has to be based on reasonable grounds.
Furthermore, in relation to some SARs, the POCA 2002
provides alternative conditions for the basis of SARs. For
example, in the case of the first two offences of failing
to report,[76] which are based on either a subjective or
objective basis. Thus, if mere suspicion has to be based on
reasonable grounds, as required by the Court of Appeal
in the case of Shah,[77] an objective basis is rendered
redundant. Consequently, the court’s interpretation of
the notion of suspicion may be incompatible with the
provisions of the Act.The significant result of interpreting
suspicion by the Court of Appeal in the case of Shah[78]
is that the number of submitted SARs will indeed
largely decrease in the near future as a result of such
interpretation.[79] This is evidenced by statistics that
highlight that the SARs contained consent requests,
which were submitted by reporting entities, decreased in
the years 2011 and 2012, compared to 2010. There were
14,334 consent requests in 2010, 13,662 consent requests
in 2011 and 12,915 consent requests in 2012. However,
the total number of SARs with consent requests increased
to 14,103 in 2013, but this is attributable to the increase in
the number of reporting entities.[80]
Nevertheless, the overall number of submitted SARs to
the NCA increased in the years 2013 and 2014. This was
16
due to the existence of new registrants and reporters.[81]
Reporting entities are aware that the Court of Appeal in
the case of Shah[82] requires suspicion to be based on
grounds or facts.
In reality, the notion of suspicion causes a number of
dilemmas when it comes to the SARs on ML. This is
particularly the case for a customer’s financial affairs and
reputation, even if his transaction is not suspended but
a SAR is submitted, which informs that his account is
suspected to be involved in ML.This could seriously harm
a customer’s reputation, especially if he is a famous firm or
publically known. On the other hand, the situation could
also badly affect the reporter’s reputation, notably if the
reporter is a bank. Financial institutions, including banks,
are legally obliged to submit a SAR once they have a
mere suspicion that a transaction could be involved in ML
(this also applied to the financing of terrorism under the
Terrorism Act 2000). Otherwise, they are committing the
crime of failing to report.[83] Accordingly, if it becomes
publically known that a specific bank inconveniences their
customers, it would lose its customers or, at least, would
not attract further customers. These practical dilemmas
may necessitate that suspicion is removed from the Act as
a basis for SARs. There are two main reasons to support
this argument.
First, the current practice may allow the submission
of SARs to the NCA for revenge purposes. For example,
if there is a quarrel between a banker and one of his
customers, the banker can submit a SAR on the basis of
merely suspecting that the customer’s account is involved
in ML activity. Although the relevant customer can
challenge the allegation of bad faith, it is difficult to prove
since the Act requires the banker to submit a SAR on
mere suspicion.
Second, as mentioned above, the first two offences of
failing to report are based on being either subjective or
objective, which means that the prosecution must prove
one of three alternative elements, namely 1) knowledge,
2) suspicion, and 3) reasonable grounds for knowledge or
suspicion. As a result, the reasonable grounds element in
this case seems a redundant alternative, since it is harder
to prove than suspicion and, accordingly, the prosecution
prefers the suspicion element so as to avoid having to
establish a more onerous case.[84]
Being able to submit a SAR on mere suspicion may
also be challenged by virtue of art 8 of the 1950 European
Convention on Human Rights (ECHR), as incorporated
by the Human Rights Act 1998, particularly if the
divulgement has a serious impact on a person, as discussed
above.
Article 8 of sch 1 of the Human Rights Act 1998
provides that:
“1 Everyone has the right to respect for his private and
family life, his home and his correspondence.
2 There shall be no interference by a public authority with
the exercise of this right except such as is in accordance
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with the law and is necessary in a democratic society
in the interests of national security, public safety or the
economic well-being of the country, for the prevention of
disorder or crime, for the protection of health or morals, or
for the protection of the rights and freedoms of others.”
The content of this article is same as art 8 of the 1950
ECHR. It seems that there is an incompatibility between
the interference under art 8 (2) (the minimum necessary
degree to achieve the legitimate aim pursued) and
suspicion as a basis for SARs and it may well be that
the legitimate goal pursued, mentioned in art 8 (2), is
exceeded in this context which is counteracting ML.[85]
Hence, for the aforementioned arguments, in order
to ensure fairness, the basis for a SAR should either be
actual knowledge, such as in the case where the customer
explicitly confessed, in front of the banker, that the amount
he received in his account is a result of drug trafficking, or
objective reasonable grounds for knowledge of.[86]
The situation in the UAE
Article 15 of the Federal Law on Money Laundering
Criminalisation 2002 (FLMLC 2002) spells out the basis
for submitting SARs to the UAE FIU, namely Anti-Money
Laundering and Suspicious Cases Unit (AMLSCU).
Article 15 of the FLMLC 2002 provides that:
“Chairmen, members of Boards of Directors, managers
and employees of financial institutions and other financial,
commercial and economic establishments who have known but
refrained from notifying the unit provided for in art 7 of this
Law of any act that occurred in their institutions and was
related to the money laundering offence, shall be punished with
imprisonment or with a fine not exceeding Dhs. 100,000 and
not less than Dhs. 10,000 or with both punishments.”
The penalties for the offence are imprisonment or a
fine between 10,000 AED (which is about £1,725) and
100,000 AED (which is about £17,245) or both. Article
15 of the FLMLC 2002 does not mention the period
of imprisonment. However, pursuant to the general rule
contained in art 69 of the UAE Penal Code 1987, the
term ‘imprisonment’ must not be less than one month
and not more than three years, unless the law provides
another period.
The article makes clear that it applies to chairmen,
members of the board of directors, managers and
employees of banks and other financial institutions if
they do not inform the AMLSCU about an act at their
institution, which is related to a ML offence.
The offence depends on fulfilling one requirement,
namely that the person charged must have actual
knowledge, ’who have known’,[87] that a ML offence has
occurred in his/her institution. Accordingly, the offence
cannot be committed on a mere negligence basis. This is
unlike the UK’s SARs regime, as analysed above.
This means that that if a person who works in a bank
or other financial institution suspects or has reasonable
grounds to suspect that a ML offence occurred in his/
her institution and does not inform the FIU, he/she
would not be committing the offence, since the FLMLC
2002 states that it only applies to the people ‘who have
known.’[88] Thus, the absence of the terms ‘suspect’ or
’reasonable grounds to suspect‘ may not assist banks and
other reporting entities to effectively detect SARs.
Conflict with the Central Bank Regulations 24/2000
The basis of submitting SARs under the FLMLC 2002 is
subjective; however, under the Central Bank Regulations
(CBR 24/2000), it is objective. Pursuant to the CBR
24/2000 and its Addendum 2922/2008, all reporting
entities have to report ML cases if there are reasonable
grounds for suspicion that the funds are derived from
criminal activity or are going to be used for TF to the
head of AMLSCU.[89] The expression reasonable
grounds to suspect does not mean actual knowledge.
Thus, reasonable grounds to suspect is sufficient.
However, there is no judicial interpretation for the terms
reasonable grounds and suspicious in relation to ML cases.
This is unlike the UK’s situation, as analysed above. For
the purpose of criminalising ML, courts in the UAE did
not define the term suspicious or reasonable grounds for
suspicion. This could be attributed to the fact that the
FLMLC 2002 adopts a subjective test, namely actual
knowledge, as a basis for submitting SARs on ML, as
discussed above. Nevertheless, the CBR 24/2000 and its
Addendum 2922/2008 adopt an objective test as a basis
for submitting SARs on ML. In fact, the amendment was
made because of the lack of clarity. On the one hand, there
was the term unusual transaction contained in art 16 (1)
of CBR 24/2000. On the other hand, the term suspected
transactions was used in art 16 (2) of the same regulation.
This difference led to a lack of clarity in relation to how
to judge a suspicion, ie whether it is a subjective test,
objective test or both.[90] Indeed, courts should define
and clarify the terms ‘suspicious’ and ‘reasonable grounds
for suspicion’, especially in light of the variations between
the FLMLC 2002 and the CBR 24/2000 in the basis of
submitting SARs.
This variation, on the basis of submitting SARs
between the FLMLC 2002 and the CBR 24/2000, has
serious legal consequences. The FLMLC 2002 imposes
criminal liability on people, simply for ‘having known’ that
the funds derived from criminal activity and refraining
from reporting SARs to the AMLSCU.[91] It does not
criminalise people in cases where they have reasonable
grounds to suspect, which the CRB 24/2000 requires.
Accordingly, no criminal liability will be imposed if a
compliance officer did not fulfil the requirement in the
CBR 24/2000.
This variation for submitting SARs causes ambiguity
for the reporting entities, especially the banking sector.
The basis of a SAR is still unclear. Mr Z, from bank D in
the UAE, confirmed that the basis of SAR is objective,
whilst Mr S, from Bank E in the UAE, stated that it is
both objective and subjective. One reason why ambiguity
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17
Financial Regulation International · September 2015 · Issue 18.7
may exist is the conflict between the CBR 24/2000 and
the FLMLC 2002 in relation to the basis of submitting
SARs. Reporting entities do not fully understand the
basis for SARs, whether subjectively, objectively, or
both. This is evidenced by the fact that there are huge
differences between the numbers of received SARs
and the numbers of SARs that were transmitted to the
Public Prosecutions Office between June 2002 and May
2009. The AMLSCU received 80,592 SARs about ML
from the reporting entities. Despite this large number
of SARs, only 285 SARs were transmitted to the Public
Prosecution Office.[92] In addition, the AMLSCU
only referred four SARs out of 1,750 to the Public
Prosecution Office in 2009. Furthermore, despite a sharp
increase in the number of submitted SARs in 2010, the
AMLSCU only referred three SARs out of 2,871 to
the Public Prosecution Office in 2010.[93] Such huge
variations between the number of SARs received by
the AMLSCU and the number of referred SARs to the
Public Prosecution Office could be attributed to one
of two reasons, or both. Firstly, the AMLSCU has not
sufficient employees and thus, it cannot properly fulfil its
commitments when analysing suspicious transactions/
activities. Analysing SARs represents the backbone of
the AMLSCU functions. Secondly, the reporting entities
may have adopted a defensive approach because the
basis of submitting SARs is vague. They may send all
transactions cases, which appear to be just ‘unusual’,
without taking into account the reasonable grounds to
suspect that there is ML. Nevertheless, if so, it prompts
questions surrounding the role/responsibility of the
Central Bank or even the AMLSCU in issuing guidance
and directing reporting entities in order to avoid such
a ‘defensive’ approach and improve the quality of
future SARs.
Conclusion
In the UAE, the CBR 24/2000 establishes reasonable
grounds to suspect as a basis for SARs, whilst the FLMLC
2002 requires actual knowledge. In other words, the
FLMLC 2002 and the CBR 24/2000 are inconsistent
on the bases for submitting SARs. The regulations
require that all banks and other financial institutions,
including their members of the Board of Directors,
managers and employees submit SARs to the UAE
FIU if there are reasonable grounds for suspicion that
the funds are derived from criminal activity. In contrast,
the FLMLC 2002 only imposes criminal liability if the
aforementioned people ‘have known’ that the funds
derived from criminal activity and have refrained from
submitting SARs to the UAE FIU. This means that no
criminal liability is incurred. For example, if a banker
failed to submit a SAR to the UAE FIU, despite having
reasonable grounds for knowing or suspecting that a
transaction was involved in ML.
In the UK, the basis for submitting SARs, especially on
the basis of mere suspicion, raises a number of practical
18
and legal problems. The decision of the Court of Appeal
in the case of Shah[94] emphasises problems and has
caused confusion about the notion of suspicion. Serious
consequences can arise when a SAR is submitted to the
UK FIU on mere suspicion, especially for a customer’s
rights and reputation. As a discloser, a bank may also
gain a bad reputation and become known for annoying
its customers by suspending their transactions/activities
without reasonable justifications. A bank may even lose
its customers or not attract new ones. Hence, in order
to overcome such a dilemma, the basis of SARs should
either be objective, namely the reasonable grounds for
knowledge or suspicion, or subjective, namely just actual
knowledge. The mere suspicion must be removed from
the basis of SARs, since it is a broad term and can be used
for revenge purposes.
There are two main reasons that support the
aforementioned argument. First, the current practice may
allow the submission of SARs to the FIU for revenge
purposes. For example, if there is a quarrel between a
banker and one of his customers, the banker can submit a
SAR on the basis of merely suspecting that the customer’s
account is involved in ML activity. Although the relevant
customer can challenge the allegation of bad faith, it is
difficult to prove because the banker is legally obliged
to submit a SAR on a mere suspicion. Secondly, the first
two offences of failing to report, which are contained
in the POCA 2002,[95] are based on either subjective
or objective. This means that the prosecution must prove
one of three alternative elements, namely 1) knowledge,
2) suspicion and 3) reasonable grounds for knowledge
or suspicion. As a result, in this case, the reasonable
grounds element seems a redundant alternative. This is
because this element is harder to prove than suspicion
and, accordingly, the prosecution prefers the suspicion
element in order to avoid establishing a more onerous
case.[96]
Being able to submit a SAR on mere suspicion
may also be challenged by virtue of art 8 of the 1950
European Convention on Human Rights (ECHR), as
incorporated by the UK Human Rights Act 1998. This
is particularly the case if the divulgement has a serious
impact on a person, as discussed above. Hence, for the
aforementioned arguments, the basis for SARs should
either be actual knowledge, such as in the case where the
customer explicitly confessed, in front of the banker, that
the amount he received in his account is a result of drug
trafficking, or objective reasonable grounds for knowledge
or suspicion in order to ensure fairness.
Dr. Waleed Alhosani can be contacted at: alhosany99@
hotmail.com
Endnotes
1. [2010] EWCA Civ 31.
2. FATF Recommendation 20.
3. Ibid.
www.financialregulationintl.com
4. Ahmad (Mohammad) v HM Advocate, [2009] HCJAC 60,
paras 30 & 37.
5. Angela Leong, The Disruption of International Organised
Crime : An Analysis of Legal and Non-legal Strategies
(Ashgate Publishing Limited 2007), 155.
6. George Brown and Tania Evans, ‘The Impact: The
Breadth and Depth of the Anti-money Laundering
Provisions Requiring Reporting of Suspicious Activities’
(2008) 23 (5) Journal of International Banking Law and
Regulation 274, 275.
7. (N 4).
8. Paul Hynes, Nathaniel Rudolf and Richard Furlong,
International Money Laundering and Terrorist Financing:
A UK Perspective (First Edition, Sweet & Maxwell/
Thomson Reuters 2009), 229.
9. Jonathan Fisher,‘The Anti-Money Laundering Disclosure
Regime and the Collection of Revenue in the United
Kingdom’ (2010) 3 British Tax Review 235, 237.
10. Robin Booth and others, Money Laundering Law and
Regulation: A Practical Guide (First Published, Oxford
University Press 2011), 136.
11. Ibid.
12. Ibid, 137.
13. Stephen Gentle, ‘Proceeds of Crime Act 2002: update’
(2008) 56 (May) Compliance Officer Bulletin 1, 16.
14. S330(2), s331(2) and s332(2) of the POCA 2002.
15. Robert Stokes and Anu Arora, ‘The Duty to Report
Under the Money Laundering Legislation Within the
United Kingdom’ [2004 May] Journal of Business Law
332, 345.
16. That a reasonable person would have known or the
person charged ought to have known that.
17. Doug Hopton, Money Laundering, A Concise Guide for
All Business (Second Edition, Gower Publishing Limited
2009), 61.
18. Jonathan Fisher (n 9) 237.
19. [2006] EWCA Crim 1654.
20. Ibid para 16.
21. Ibid.
22. Which was repealed by POCA 2002, sch 12 para 1.
23. (N 19).
24. [2006] EWCA Civ 1039.
25. Jonathan Fisher (n 18) 238.
26. [2001] UKHL 1.
27. Ibid para 116.
28. Robin Booth and others (n 10) 47.
29. (N 19).
30. Chambers English Dictionary, (Cambridge 1988).
31. (N 19).
32. Ibid paras 12 & 19.
33. Ibid para 16.
34. S340 and s331 of the POCA 2002.
35. (N 19).
36. Ibid para 8.
37. (N 24).
38. Ibid para 21.
39. (N 19).
40. (N 24).
41. (N 19).
42. Commonwealth Secretariat, Combating Money Laundering
and Terrorist Financing: A Model of Best Practice for the
Financial Sector, the Professions and other Designated
Businesses (Second Edition, Commonwealth Secretariat
2006), 138.
43. Robin Booth and others (n 10) 49.
44. [2010] EWCA Civ 31.
45. Charles Proctor, The Law and Practice of International
Banking (Oxford University Press 2010), 159.
46. Doug Hopton (n 17) 62.
47. ‘Proceeds of Crime Act 2002 Part 7 - Money
Laundering Offences’ (Updated 15/09/10), available
online
at: http://www.cps.gov.uk/legal/p_to_r/
proceeds_of_crime_money_laundering/ (accessed on
2nd April 2015).
48. Arun Srivastava, ‘UK Part II: UK law and practice’ in
Mark Simpson, Nicole Smith and Arun Srivastava (eds),
International Guide to Money Laundering Law and Practice
(Third Edition, Bloomsbury Professional 2010), 27 at 41.
49. Robin Booth and others (n 10) 49.
50. [2006] EWCA Crim 2155.
51. Ibid para 12.
52. This case is not a reported case and it is mentioned in
George Brown and Tania Evans (n 6) 275. In addition, this
case has been published on the BBC website at: http://
news.bbc.co.uk/1/hi/england/lancashire/6647473.stm
(accessed on 13th March 2015).
53. Ibid.
54. (N 4).
55. Contrary to the POCA 2002, s330.
56. (N 4) para 1.
57. See, FATF Public Statement, ‘High-risk and noncooperative jurisdictions, jurisdictions for which an
FATF call for action applies’ published by the FATF on 18
October 2013, available online at: http://www.fatf-gafi.
org/topics/high-riskandnon-cooperativejurisdictions/
documents/fatf-public-statement-oct-2013.html
(accessed on 2nd March 2015).
58. Stephen Gentle (n 13) 16.
59. Ibid.
60. Commonwealth Secretariat, (n 42) 139.
61. For further detail, see, Rose-Marie Antoine,
Confidentiality in Offshore Financial Law (First published,
Oxford University Press 2002), 7. See also, Richard Hay,
‘Offshore financial centres: the supranational initiatives’
(2001) 2 Private Client Business 75, 76.
62. Commonwealth Secretariat, (n 42) 139.
63. Doug Hopton (n 17) 62.
64. [2005] EWHC 664 (Ch).
65. Ibid.
66. Ibid para 7.
67. (N 19).
68. (N 24).
69. (N 1).
70. Under s338 of the POCA 2002 (authorised disclosure).
71. Which is about £206m.
72. (N 1) para 22.
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Financial Regulation International · September 2015 · Issue 18.7
73. Ibid para 25.
74. Paul Marshall, ‘Does Shah v HSBC Private Bank Ltd
make the anti-money laundering consent regime
unworkable?’ (2010) 25 (5) Journal of International
Banking and Financial Law 287, 288.
75. Keith Stanton, ‘Money laundering: a limited remedy for
clients’ (2010) 26 (1) Professional Negligence 56, 58.
76. S330 and s331 of the POCA 2002.
77. (N 1).
78. Ibid.
79. Paul Marshall (n 74) 287.
80. See ‘Suspicious Activity Reports Regime, Annual Report
2010’ as produced by the SOCA, 11, ‘Suspicious Activity
Reports Regime, Annual Report 2011’ as produced by
the SOCA, 10, ‘Suspicious Activity Reports Regime,
Annual Report 2012’ as produced by the SOCA, 12 and
‘Suspicious Activity Reports Regime, Annual Report
2012’ as produced by the NCA, 6.
81. For the SARs statistics in 2013 and 2014, see ‘Suspicious
Activity Reports Regime, Annual Report 2014’ as
produced by the NCA, 7 & 8.
82. (N 1).
83. S330, s331 and s332 of the POCA 2002.
84. Rudi Fortson, ‘Money Laundering Offences Under
POCA 2002’ in William Blair and Richard Brent (eds),
Banks and Financial Crime: The International Law of Tainted
Money (Oxford University Press 2008), 155 at 170.
85. For additional detail on such an issue, see Robert Stokes,
‘The banker’s duty of confidentiality, money laundering
and the Human Rights Act’ [2007 Aug] Journal of
Business Law 502. See also Clive Harfield, ‘SOCA: A
Paradigm Shift in British Policing’ (2006) 46 (4) British
Journal of Criminology 743, 753 & 754.
86. R v Saik [2006] UKHL 18.
87. Article 15 of the FLMLC 2002.
88. Ibid.
89. Topic 6 of Addendum 2922/2008 amended art 16 (1) of
CBR 24/2000. Form (CB9/200/6) for the submission
of SARs is attached to the CBR 24/2000.
90. For more details, see ‘The United Arab Emirates Mutual
Evaluation Report, Anti-Money Laundering and
Combating the Financing of Terrorism’ as produced by
the FATF on 20 June 2008, 87–89.
91. Article 15 of the FLMLC 2002.
92. See Sara Hamdan, ‘Suspect funds on the rise’ The
National, Jun 23 2009, available online at: http://www.
thenational.ae/business/banking/suspect-funds-on-therise (accessed on 19th April 2015).
93. These SARs involve one natural and two juridical
persons. See ‘AMLSCU Annual Reports – 2010’ as
produced by the AMLSCU, 25.
94. (N 1).
95. S330 and s331 of the POCA 2002.
96. Rudi Fortson (n 84) 170.
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