Coming out brighter

“Money laundering”, said the Attorney General, “is just the other side of crime and terrorism.” With graphic pictures of the previous day’s Madrid bombings across every newspaper, Lord Goldsmith’s keynote speech hit its mark.

Many in the profession remain uneasy if not downright hostile to the reversal of client confidentiality brought about by the Proceeds of Crime Act 2002 (“POCA”) and Money Laundering Regulations 2003, the commencement of which on 1 March set the scene for the conference. But the speakers from the enforcement authorities all brought the same message – combating serious crime is the greater good.

“If we remove the proceeds of crime, we remove its working capital”, said Lord Goldsmith. Informed estimates put those proceeds at 2-5% of global GDP, or anything up to $1.5 trillion. Whether they derive from drug trafficking, immigration rackets (slave labour or the sex trade as well as exploiting refugees), fraud including alcohol and tobacco smuggling, or cyber crime (huge sums were made starting child porn websites, according to Graeme Pearson of the Scottish Drug Enforcement Agency), the implications for society could be catastrophic without strenuous efforts to neuter the criminals. “Gatekeeping costs money but the threat we face is so serious it’s important you recognise your responsibilities in this area”, added Pearson, pressing the message “Don’t assume you will recognise it when you see it”.

Speaker after speaker drummed it in: no criminal enterprise is not supported by criminal finance. Conspicuous in its ability to move on to new activity, its controllers can act in days, where the law takes months to follow, said Pearson, whose address drew the description “scary” from delegates, more so for being utterly factual.

“If you deal with the wealth, you will stymie the power”, he concluded. “If you don’t stymie the power, it will corrupt our society.” And the UK’s high reputation for financial integrity makes it attractive to criminals, said Lesley Thomson, head of the Confiscation Unit at Crown Office.

Aiming to be accepted

The initial placement of the dirty money is the high risk stage for the criminals. Almost inevitably lies have to be told or indiscretions shared. If they surmount that hurdle they enter the “layering” phase – a series of transactions, perhaps a few, perhaps dozens, designed to conceal its illicit origins. The third and final stage is integration into the legitimate economy.

It is reasonable to assume that a substantial amount finds its way into legitimate or quasi-legitimate business enterprises. Favoured are cash-rich, low-overhead operations like taxi firms or sunbed shops, but the diverse outlets also include gambling, offshore investments, property ownership and development, life policies and manipulation of company accounts.

“I understand your concerns, in particular about the reporting obligations”, said the Lord Advocate – in a previous incarnation a conveyancer in private practice – who opened the conference. “However, one of the most common ways of attempting to integrate proceeds of crime into the legitimate business world is through the purchase of property.”

“If you act honestly in your business dealings”, he continued, “alive to the fact that you may be asked by a client to become involved in a transaction which involves the laundering of money, and follow the obligations to report them, you need have no fear. If however you are prepared to launder money or you are prepared to act where you suspect or have reasonable grounds for suspecting that the funds used are the proceeds of crime, then you commit a serious criminal offence. As Lord Advocate I would have no hesitation in investigating and where there was a sufficiency of evidence in prosecuting such offences.”

A three-pronged weapon

Hence the width of the three money laundering offences in sections 327, 328 and 329 of POCA, each of which carries a maximum 14 years on indictment:

By section 327 it is an offence if a person conceals, disguises, converts or transfers criminal property or removes it from anywhere in the UK. Property, anywhere in the world, is “criminal property” if it constitutes or represents a benefit from criminal conduct and the alleged offender knows or suspects that. “Criminal conduct” is conduct which constitutes an offence in any part of the UK or would if it occurred there. It is immaterial, the Lord Advocate emphasised, whose conduct it was, who benefited from it, where it occurred, or that it occurred prior to the Act.

The section 328 offence is committed if a person enters into or becomes concerned in an arrangement which they know, or suspect, facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person – including client transactions.

Section 329 concerns acquiring, using or having possession of criminal property. There is a defence of adequate consideration, so that tradesmen and others who are paid for consumable goods and services are not bound to question the source of the money.

In each case, by the definition of criminal property, knowledge or suspicion is a precondition of the offence. Thus holding money in a client account could be an offence under section 329 – but only if that knowledge or suspicion is present.

Thou shalt blow the whistle

The second plank of the legislation, as Colin Boyd put it, is the disclosure rules. It is a defence to each of the above offences to make an authorised disclosure under section 338 and (if the disclosure is made before the act in question) receive appropriate consent, or to intend to make a disclosure but have a reasonable excuse for not doing so. Conversely, for solicitors and others within the regulated sector – those areas of business  subject to the 2003 Regulations – failure to disclose is itself an offence under section 330. The Lord Advocate told of a senior solicitor who felt under an obligation to report a transaction of a longstanding client where he had no reason to suspect her of money laundering, but the offence only arises if the solicitor knows or suspects (the subjective test) or has reasonable grounds for knowing or suspecting (the objective or “negligence” test) that a person is involved in money laundering.

There is no need, he emphasised, to report on speculation, or mere “cause for concern” – though the latter should lead to further enquiry of the client. The section gives a choice of disclosing direct to NCIS, appropriate for a sole practitioner, or to their nominated officer (the money laundering reporting officer) who operates as filter for disclosures to NCIS.

Once the buck has passed to that officer, they in turn commit an offence under section 331 if they fail to report, applying the same tests. As with section 330 the maximum on indictment is five years. There are defences of reasonable excuse, or (under section 330) for information received by a professional legal adviser in privileged circumstances (see below), or if they have no actual knowledge or suspicion and their suspicions were not aroused due to their employer’s failure to provide the training required under the Regulations – that being another offence, of course.

Following a report, a transaction can proceed if no notice refusing consent is received within seven working days – though NCIS will try and confirm if there is no objection – or 31 calendar days elapse from receipt of such notice.

As Bruce Ritchie of the Society explained, in the light of these provisions the Society is having to revise the Code of Conduct for Scottish Solicitors as it relates to client confidentiality (watch the Journal for further news, he said). The professional privilege exception is defined quite narrowly in both POCA and the Regulations as information communicated by a client or his representative in connection with the giving of legal advice or in connection with legal proceedings or contemplated proceedings – but not information communicated with the intention of furthering a criminal purpose (including laundering money). In other words, if the client is using the solicitor unwittingly to assist the client in committing a crime, that is not subject to legal privilege. It does not matter if the client is not the prime mover.

Although there is currently talk of a challenge to the Act in the English courts, until any challenge is upheld its provisions must prevail.

Tipping off - no comment

There are two further offences under sections 333 and 342, of tipping off and prejudicing an investigation. A person who knows or suspects that a report has been made to a nominated officer or NCIS, or that a money laundering investigation is being or will be carried out, must not tell the subject of the report or investigation. Informing someone other than the subject may constitute the offence if prejudicial. It is a defence, however, if the discloser did not know or suspect that a disclosure was likely to prejudice any investigation or it was made by a legal adviser to a client in connection with the giving of legal advice or to any person in connection with legal proceedings or contemplated proceedings, provided it was not done to further a criminal purpose.

As Joe Platt pointed out, the offence as defined could require a solicitor to lie to his client if asked directly whether disclosure has been made. Bruce Ritchie had some comfort to offer – in his view giving general advice to clients at the outset that solicitors require to comply with the legislation is not tipping off because at that stage there is no knowledge of an investigation and no disclosure. You could therefore insert a suitable clause in your terms of business letter (as in the style for residential conveyancing – Journal, November 2003, page 47) or put up a notice in the office advising that clients may no longer be able to rely on the duty of confidentiality where the solicitor knows or suspects that criminal property is involved – including tax evasion or benefit fraud. It may be appropriate to add that if a solicitor fails to make such a report, they – and the client – face a possible prison sentence; or that if the client asks about disclosure, this will neither be confirmed nor denied.

Another essential safeguard, said Bruce, is that firms do not record any correspondence with NCIS in the client’s own file, but in a central file running in date order.

Compliance without panic

The sheriff may make a production order (including removal of information from a computer) or grant a search warrant. A solicitor, Bruce told us, should comply unless the information is genuinely subject to legal privilege, and should not report to the client unless authorised by the police or fiscal. But read the order carefully, keep a copy and do not produce more than is required. The Society is trying to discourage orders in very wide terms, and wants to know if you are confronted with one.  If you are asked to produce a statement going beyond what is covered by the order or warrant, you should offer to be precognosced on oath and let the court decide what should be divulged.

In a confiscation investigation or civil recovery (but not a money laundering investigation), the Crown can seek a disclosure order. This covers questions as well as provision of documentary or computer information. While legal privilege is protected, disclosure orders take preference over any restriction on the disclosure of information.

Bruce Ritchie’s advice is that it is worth discussing with the police what exactly they are looking for; and they will usually wait while you phone the Society for guidance.

To end on a positive note, Bruce or Leslie Cumming at the Society will try and advise in cases of doubt as to duties under the legislation. Give them all the relevant information and keep a note of their advice. If the matter is urgent, say so, especially when communicating by letter or email.

Bruce’s concluding advice? “Be alert to developments. Don’t panic. The Society will back you if you make a report to NCIS and there is a complaint of breach of confidentiality.”