A Money Laundering Update

 

It’s been a busy year.  For a start, the case law has moved on.

 

 

Yes, that’s a shame really.  You see, the major part of P v P [2003] EWHC 2260 was overruled by the Court of Appeal in the later, and much more closely argued, case of Bowman v Fels [2005] EWCA Civ 226.  That has had very wide ramifications.

 

 

No, I’m afraid it didn’t. You’re quite right in thinking that the actual case concerned litigation.  The fundamental decision was that the conduct of litigation, from start to finish, could not constitute an “arrangement”, and therefore acting for a client in litigation was not an offence under section 328 of the Proceeds of Crime Act 2002 (‘POCA’).  So, one change you may want to effect is whether you relax the procedural requirements on the litigation department, in the light of this and the Law Society’s guidance, which indicates that litigation is probably not ‘regulated sector’ work under the Money Laundering Regulations 2003 (‘the Regulations’).

 

 

The Court in Bowman v Fels went on to deal with some fundamental issues regarding legal professional privilege, and the consequences for tipping-off.  These observations, ironically, have most impact on transactional lawyers.  Essentially, the Court delivered a robust defence of the concept of privilege, and indeed indicated that where information which ordinarily would be reportable has come to a lawyer in privileged circumstances, not only may he not be obliged to report it; but he might be in breach of privilege if he does so.  In other words, he may be in the somewhat absurd situation where he either has to ask if the client is prepared to waive privilege, so that the lawyer can report him to the authorities; or he has to withdraw from the matter – presumably without telling the client why he is doing so.

 

 

In practice, it’s likely to be your Money Laundering Reporting Officer (‘MLRO’), and he or she may have to take a pretty swift decision.  For that reason, it’s essential that the MLRO becomes an expert on privilege, its application and, just as importantly, its limitations.  The MLRO in particular should pay very careful attention to the detailed guidance which the Law Society has issued, specifically on the effect of Bowman v Fels.  That can be downloaded from the Law Society’s website.

 

No, I don’t think it is.  You’ve said you based your training on P v P.  Everyone you’ve trained is therefore working on an incorrect premise, and you should put that right.  It’s for just this sort of reason that the obligation to train staff is a continual one, not just a one-off.

 

 

Let’s just stick for a moment with the Law Society guidance.  You’ll remember that they originally brought out what they called ‘Pilot Guidance’, in January 2004.  That’s now been supplemented, not only by the specific Bowman v Fels guidance I mentioned a moment ago, but also by a set of sector-specific guidance notes, e.g. for probate lawyers.  These draw together the threads of guidance for each chosen sector.  You could do worse than to base your training around those.

 

 

Anyone charged with an offence could refer to it in Court, and seek to rely on it.  The Court wouldn’t have to follow the guidance, but it is likely it would have persuasive effect.  It would only become binding if it were approved by the Treasury, and there are problems in seeking that consent.

 

 

For one thing, there is still very considerable uncertainty as to what the statutory provisions actually mean.  Until the Courts get to grips with things further, it is very difficult to seek to give authoritative opinions on a number of grey areas.  Also, as mentioned, the position is changing: not just in the aspects of the law itself, but in the ways in which other groups are dealing with matters.

 

 

When the Law Society guidance was drawn up, the most authoritative guidance around, for them to draw on, was that issued by the Joint Money Laundering Steering Group (‘JMLSG’).   That’s a group drawn largely from the mainstream financial industries, like banking, insurance, and financial services.  They’ve just made some major changes to their guidance, and those changes have just been approved by the Treasury, on 13^th February 2006, so this is now guidance to which a Court must pay attention.

 

Those who fall within the JMLSG’s ambit now have six months to change their practices to fall in with the new ideas.  In many ways this will be easier for them.  For instance, in routine cases, it will now be regarded as sufficient for a new client’s identity and address to be verified from a single document, rather than two or more.  Many firms would welcome that.

 

 

The basis of the changes is to approach the whole area from much more of a risk-based perspective.  What that means is that firms will not be able to rely so much on a mechanistic approach, i.e. just doing what someone else tells them in guidance, and applying the same principles to all cases.  The new approach means that there needs to be much more careful analysis of the areas in which there are high risks, so there’s more work there for the MLRO and team in carrying out that analysis, and introducing procedures for high-risk matters.  It’s important to remember that the underlying duties created by POCA and the Regulations haven’t changed, and it is still for each firm to be satisfied that its procedures and policies are adequate to protect it.

 

 

It isn’t!  It really is a poisoned chalice of a job.  There’s a case pending at the moment where a MLRO is under threat of prosecution for allegedly allowing a transaction to proceed, after a report had been made to NCIS, but before consent had been obtained.  It all goes to reinforce the point that I’ve made before, which is that when a firm asks someone to take this job on, they really have got to give their chosen victim a chance, by allowing him the time and resources to do the research and analysis that is an essential part of the job.

 

 

Yes, though they’re not major.  The Serious Organised Crime and Police Act 2005 tinkered with a few money laundering related matters.  There are really only two which are likely to concern you.

 

The first one actually should make life easier, if you’ve got any cross-border transactions.  You will remember I told you ages ago that, if you had a client who was a Spanish bullfighter, and wanted to buy a house in this country using his earnings, you would have to regard that as criminal property, even though it was perfectly legal in Spain, because the conduct which gave rise to the property would have been a criminal offence under UK law if it had been carried out in this country.  Now, if you reasonably believe that the acts took place abroad, and if those acts actually do not constitute an offence in the relevant country, then the resultant money is not to be regarded as criminal property.  Two points to watch are that your belief is irrelevant as to the legality or otherwise of the acts in the foreign country – that’s a matter of fact only.  The other is that the Minister has power – as yet unused – to say that certain specified offences do not get the benefit of the new provisions, so that the old principles apply.

 

 

An additional test is to be applied, when considering whether information is held which should be disclosed to the authorities.  The obligation now bites only if the existing tests are satisfied, and if the person with the information

 

The idea is that if making a report would be totally pointless, because neither the offender nor the property could be traced, the reporting needs are not triggered.

 

 

I’m afraid so!  The European authorities have made a Third Directive, which the UK Government will have to bring into our domestic law during the next year or so.  That will have some quite far reaching effects.  Some of those can be fairly well identified at this stage, and you may want to start thinking about altering your systems to cope with them.

 

Probably the biggest thing is going to be a considerably increased emphasis on customer due diligence (‘CDD’) procedures.  Roughly translated, that means you’ll be required to do a lot more to find out about your client – not just at the start of a case or a business relationship – but at all times throughout that relationship.  That will have implications for the ways in which you collect, store, and continually update that information.

 

 

Potentially, quite a wide range of people.  You’ll be required to give a lot more thought to who the beneficial owner or owners are, behind the person or body which is ostensibly your client.  So, for a company or a trust, say, you’ll have to identify any natural person  who has a share of 25% or more of the underlying benefit.. That’s going to give rise to some pretty complex definitions, by the time it gets into domestic law.  For instance, in terms of relative percentages of a trust, how on earth do you compare an interest in possession with one which is contingent, or in remainder?

 

 

No.  Once again the idea is that the approach is risk based, just like the JMLSG approach.  So, you have to decide what types of work, and / or types of client, are going to bring about larger or smaller than usual risk, and tailor the procedures accordingly.  The legislation is likely to offer some guidance, but it won’t be exhaustive, and again there is going to be a lot work for the MLRO.  He or she should certainly be gearing up now for the introduction of these new principles.

 

 

No, it isn’t.  For a start, it will involve not only criminal property but any money or property related to terrorist activities (even if its origins are perfectly legal).  It will redefine the sorts of businesses which are covered by the law, and the sorts of crime which it must apply to – though the UK Government may well follow its preferred option of applying it domestically to all crime.  It will look again at what is a business relationship which is sufficient to trigger the legislation’s application; and what is a one-off transaction which will not.  A lot of it, however, is still very vague and woolly.  For instance, it says you should be able to “rely on” certain other businesses to do checks for you; but then says that if you do so, and the checks prove inadequate, the responsibility falls back on you!  So I’m afraid your poor old MLRO will just have to try to keep up with all of this as it develops, and we’ll have to talk about it again in a year or so’s time.

 

Simon Young MBA is a solicitor and management consultant.

 

syoung@eurobell.co.uk