Source: https://iclg.com/practice-areas/corporate-investigations/corporate-investigations-2017/3-money-laundering-issues-in-corporate-investigations--navigating-the-maze
Timestamp: 2017-11-24 02:12:57
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Money Laundering Issues in Corporate Investigations | ICLG
Home Practice area Corporate Investigations Money Laundering Issues in Corporate Investigations: Navigating the Maze
Part 1: The AML Provisions
Part 2: How do the AML Provisions Apply to Corporate Investigations?
Part 3: What Does the Future Hold for the AML Provisions?
The responsibilities placed on businesses (both within and outside of the regulated sector) by the UK’s anti-money laundering legislation cannot be ignored. These legal obligations are both very wide reaching and, at first glance, disarmingly complex in nature.
This chapter highlights the key aspects of the current criminal framework set out by the Proceeds of Crime Act 2002 (“POCA”) and the regulatory framework of the Money Laundering Regulations 2007 (“the Regulations”) (together “the AML provisions”). It also aims to provide some helpful practical guidance to those facing money laundering issues that may arise in the context of a corporate investigation, and briefly to discuss the potentially highly significant proposed changes to the AML Provisions that are heralded by the UK government’s Money Laundering Action Plan and Criminal Finances Bill, and the Fourth EU Money Laundering Directive.
In the constantly shifting legal landscape it is vitally important that businesses remain well informed of their legal obligations in respect of anti-money laundering and, perhaps more vitally, that they be able to demonstrate the practical application of those highly significant provisions in order to protect both the corporate and its staff from becoming the targets of law enforcement activity.
(i) What is money laundering?
Money laundering refers to the concealment of the origins of illegally obtained money (referred to within the legislation as the “proceeds of crime”). Such concealment typically occurs by means of transfers involving legitimate businesses; meaning that those entities must stay alert to the risk that they could find themselves unknowingly assisting or participating in such criminal activity and therefore could be considered guilty of not only a regulatory offence but more importantly, criminal conduct.
(ii) Who does this chapter apply to? Not just those within the Regulated Sector
Although the main impact of the AML provisions is on those within the financial services and other communities who are subject to the core AML provisions, i.e. those within the “regulated sector” (as defined within Schedule 9 of POCA), they also have the potential to impact on any business in any sector, anywhere in the world. POCA applies to all persons (both corporates and individuals) and creates criminal offences which are extremely broad, designed as they are to catch anyone who comes into contact with those intent on masking the illegal origin of their money.
Those businesses that are part of the regulated sector are also subject to additional regulatory requirements brought into being by the Regulations, which supplement the criminal provisions contained in POCA (and are also reflected in guidance issued by regulators such as the Financial Conduct Authority (“the FCA”), and we outline those requirements below in the context of key money laundering issues which might become live in the context of corporate investigations.
(iii) The Criminal Offences created by POCA
POCA introduced several criminal offences (often referred to as dividing into “principal offences” and “secondary offences”) designed to prevent those handling the proceeds of crime from using certain key financial and other services. It is also, of course, aimed at preventing others who operate within the regulated sector from assisting such persons.
It should be noted that POCA has extra-territorial reach, as has been confirmed (somewhat controversially) by the Court of Appeal in R v Rogers1, when the court confirmed that even if all of the conduct constituting money laundering takes place outside of the United Kingdom, the English courts still have jurisdiction to convict a defendant for such conduct2. All that is required for the English courts to be able to validly claim jurisdiction is for the defendant to be physically brought before the court.
POCA creates three broad, principal money laundering offences, which refer to deliberate, overt acts in relation to money laundering. These are:
Section 327: concealing, disguising, converting or transferring criminal property or removing it from the jurisdiction (this includes concealing or disguising its nature, source, location, disposition, movement ownership or any rights connected with it);
Section 328: being involved in arrangements to enable the retention of criminal property for another person; and
Section 329: acquiring, using or possessing criminal property.
“Criminal property” is defined (in section 340) as property that is or represents the proceeds of crime where the person holding it knows or suspects this is so.
Significantly, to be guilty of either of the above offences, actual knowledge that the funds represent criminal property is not necessary; mere suspicion will suffice. Those found guilty of such offences are liable to an unlimited fine (applicable to individuals and corporate entities alike) and up to 14 years’ imprisonment.
There are also defences available to all of the offences where the person submits a report to the authorities as soon as reasonably practicable and, if the report precedes the act, he obtains consent for it. POCA’s “consent regime” sets out a timetable by which, when a Suspicious Activity Report (“SAR”) is submitted, the National Crime Agency (“NCA”) have an “initial notice period” of seven working days to refuse consent, followed by a “moratorium period” of 31 calendar days after which (absent action by the authorities to freeze the assets) consent can be assumed.
Furthermore, POCA’s “secondary offences” are aimed at catching those who may have merely come into contact with those intending to launder the proceeds of crime and may be considered in some way to have assisted in the process of money laundering, these are:
Sections 330 to 332: the “failure to disclose” offences; and
Sections 333A to 333E: providing information to the subject of a Suspicious Activity Report (“SAR”) that constitutes “tipping off”3 (see below for discussion re Suspicious Activity Reports: Requesting a Defence (“Consent”) from the NCA).
(iv) The Money Laundering Regulations 2007
Whilst POCA creates the substantive criminal offences that form part of the AML provisions, the Money Laundering Regulations 2007 (“the Regulations”) provide the administrative and regulatory aspects of the regime for those within the regulated sector4. Whilst POCA criminalises the activity of money laundering, the Regulations are designed to impose statutory obligations upon the regulated sector in order to deny access to the financial system by those seeking to launder the proceeds of crime.
Breach of the Regulations can result in either criminal sanctions being imposed (see Regulation 45), which can incur a sentence of up to two years’ imprisonment, and/or an unlimited civil fine (see Regulation 42). Significantly, Regulation 47 (1) states that if an offence is committed under Regulation 45 by a body corporate and is shown (a) to have been committed with the consent or connivance of an officer of the body corporate, or (b) to be attributable to any neglect on his part, then then that individual officer, as well as the body corporate, is guilty of the offence.
In this way, the Regulations (which replace the Money Laundering Regulations 2003 and implement the Third Money Laundering Directive) work to complement both the criminal and civil penalties brought into being by POCA.
(v) Who do the Regulations apply to?
Broadly speaking, the Regulations apply to “credit institutions, financial institutions, auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals, trust or company service providers, estate agents, high value dealers and casinos” (see Regulation 3). In practice, this includes (for example) those operating foreign exchange services, cheque cashing businesses, and any business that deals in cash payments of €15,000 or more. One notable example of the subtleties of the Regulations is that solicitors are in the regulated sector when carrying out certain business (essentially financial or real property transactions), but not otherwise.
(vi) What do the Regulations contain?
The Regulations are designed to provide a practical, non-prescriptive and risk-based framework which can be applied by businesses to the everyday task of carrying out a comprehensive assessment of the risk posed to their business by those wishing to launder money through them; pivotal to this is the requirement to carry out due diligence checks on their customers.
Parts 2 to 4 of the Regulations impose various obligations on businesses under the headings of “Customer Due Diligence” (Regulation 5), “Record-Keeping” (Regulation 19), “Policies and Procedures” (Regulation 20), “Training” (Regulation 21), and “Ongoing Monitoring” (Regulations 8 and 14).
(vii) The Practical application of the Regulations
Deciding on the appropriate level of Customer Due Diligence
The Regulations expect businesses to implement comprehensive risk assessments aimed at identifying likely risk factors or “red flags” that could indicate that a particular customer or transaction represents a risk of money laundering. Such risk factors may focus for example on the customer’s profile (Regulation 5 and 7, Customer Due Diligence) (the individual may be considered a “politically exposed person”5, for example: see Regulation 14 (5)) or focus on the nature of the transaction itself (e.g. it is of particularly high value) or the fact that the transaction is taking place without the parties meeting face-to-face (see Regulation 14(2)), which may result in a conclusion that the appropriate customer due diligence should be “enhanced”.
The Regulations make it clear that it is not enough to simply put internal controls in place; each business relationship or transaction should be subjected to an appropriate level of ongoing monitoring, which allows for scrutiny of the transactions consistent with the level of risk that the customer is deemed to pose. As with the internal controls, documentary evidence needs to be compiled in order to demonstrate this process, thus reflecting a pro-active approach to risk management and the issue of money laundering generally.
(viii) Suspicious Activity Reports: Requesting a Defence (“Consent”) from the NCA
Importantly, a business can seek to protect itself from being accused of the principal and/or secondary money laundering offences contained in POCA by submitting a “Suspicious Activity Report” (“SAR”) to the National Crime Agency (“NCA”)6, which provides for disclosure of, and consent to take, actions that would otherwise constitute the principal offences.
The NCA has sought to make the submission of SARs “user friendly” by providing an easy to use online system as well as practical guidance for completion. After receiving the SAR, the NCA and investigators may take action under the confiscation and/or civil recovery regimes, but to prevent a transaction that is the subject of a consent report, they must refuse consent within the notice period (seven working days) and take further action before the moratorium period (a further 31 calendar days) expires7.
In practical terms this means access to bank accounts (the most common example) can be blocked until the end of the moratorium period, because the bank fears that to allow access would constitute a money laundering offence on its part.
(ix) The Implications of the Regime in a Corporate Investigation Context
The implications of the regime for a business that, for instance, discovers a risk that an employee or agent has committed a bribery or fraud offence, are potentially both complex and serious. If, for instance, a bribe has been paid to obtain an advantage for the business, or if its accounts have been used as a conduit for a fraud, then the business may in effect be in possession of criminal property if, and from the moment that, it suspects that this is the case. It will need to consider carefully whether and when the criminal property exists. Depending on the answers to these questions, it may be necessary, prudent or even advantageous to submit a SAR to the NCA, and seek consent to deal with the assets.
Meanwhile, any business that deals with banks or others in the UK’s regulated sector should also be aware of the risk that, quite apart from the above, a SAR might be submitted in respect of their assets, most typically in respect of their bank accounts. Increasingly, the UK’s banks, being understandably risk-averse in this sector, will decide to close or block accounts at the slightest hint of any matter that could give rise to a “reasonable cause for suspicion”, and because of the provisions on “tipping off”, adopt policies of not discussing these matters with their customers. Often the first hint a business will have of any such matters is an unexplained block on their accounts, or a failure to carry out a transaction.
It will often be prudent for a business against whom a SAR has been submitted to take proactive steps to contact (directly and/or via the bank or other reporter) the NCA and any investigators, offering cooperation, while meanwhile conducting its own enquiries into the likely cause of the difficulty. An effective set of representations within the “initial notice period” may cut matters short, otherwise accounts may be blocked for the remainder of the “moratorium period” or even longer.
(x) In what circumstances should a SAR be submitted?
Due to the highly subjective nature of assessing money laundering risks, it is not possible to give a simple answer to the question of when to submit a SAR. Certainly, the obligations of the regulated sector make it more important for them to do so wherever they (or more specifically, their Money Laundering Reporting Officer) have even the slightest suspicion that a third party is committing money laundering. For others, the most important question is whether there is a suspicion that assets are held, or a transaction is proposed involving assets, that are or represent the proceeds of crime; if so, then without a SAR the business is at risk of committing an offence. Such a report should be made as soon as practicable after the suspicion first arises – this may not necessarily be at the beginning of the transaction or the business relationship.
“Suspicion” in this context does not need to constitute a clear or firmly grounded belief founded on specific facts but must be more than speculation (Longmore J in R v Da Silva [1996] EWCA Crim 1654 stated that “a vague feeling of unease would not suffice”). It may be that a client is not able to answer certain important due diligence questions put to them, or a suspicion may arise simply due to the jurisdiction in which a client is operating8. Whether or not a business ultimately decides to submit a SAR will likely heavily depend on what is already known about that particular customer’s operations, including whether or not they can refer to a history of dealing with each other.
As might be expected, no anti-money laundering guidance purports to provide a “cast iron” defence to any of the offences contained in POCA and it therefore remains important to obtain your own legal advice if you remain uncertain as to the action you should take in relation to a particular transaction.
(xi) When might a business face being the subject of a SAR itself?
In addition to considering its own obligations under the AML Regime, it is crucial that a business also cultivates and maintains peripheral insight into how its operations may be viewed by those it does business with (particularly those in the regulated sector), to guard against the prospect that it will itself become the subject of a SAR, potentially causing serious reputational and/or financial damage.
As each company’s circumstances and risk profile are unique, carefully tailored legal advice should be sought in order for a company to be fully apprised of the money laundering risks it may be seen to pose to those with whom it transacts. However, in general terms, an appreciation of how the jurisdiction in which you operate is likely to be viewed, for example (in terms of perceived corruption levels or the imposition of international sanctions) may highlight a need to implement certain safeguards (such as the introduction of adequate internal risk management procedures, which are monitored on an ongoing basis).
It is this peripheral insight that is likely to be most useful in the context of a corporate investigation. To take a practical example, a business (not itself in the regulated sector) that finds that one of its staff or agents may have paid a bribe in order to win a contract needs to consider two crucial questions under the AML regime. The first question is whether it is now in possession of funds (the proceeds of a contract obtained corruptly) that it has a settled suspicion about, in which case it will need to submit its own SAR to protect itself. If that is answered in the negative, then the second question is whether anyone else (particularly those in the regulated sector, such as its bank or its accountant) is in possession of information that might oblige them to submit a SAR of their own. (This could occur, for instance, if there is adverse publicity about an entity the bank can see has paid funds to the business.) In these circumstances, then there may well be a benefit in ensuring the issues are dealt with proactively, and it may, for instance, be a factor that weighs in favour of self-reporting the suspected offence at an early stage.
(xii) The Action Plan for Anti-Money Laundering (“the Action Plan”)
The issues faced by the NCA in dealing with the AML Provisions, and specifically the “consent regime”, have been the subject of scrutiny last year. In April 2016, the joint Home Office/Treasury Action Plan for Anti-Money Laundering and Counter-Terrorist Finance (“the Action Plan”) was published, and in July 2016 the operation of the regime was the subject of a highly critical report from the House of Commons’ Home Affairs Committee (“HAC”).
The Action Plan has been hailed as representing the most significant reform to the UK’s anti-money laundering regime since the introduction of POCA. It aims to strengthen the UK’s response to money laundering and to protecting the integrity of the UK’s financial system. The Plan seeks to make the UK a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption, “with a particular focus on the illicit funds supporting and generating serious and organised crime and laundering the proceeds of overseas corruption into or through the UK, which fuels political instability in the source countries”9. Some, but not all, of those proposals have since found their way into the Criminal Finances Bill 2016–2017 (“the Bill”).
(xiii) Proposals to reform the SARs regime
Under the current law, the incentive for banks and others in the regulated sector where a transaction causes them concern is (a) to make consent reports, and (b) not to transact without consent. The problem is that the National Crime Agency’s resources are being taken up by dealing with this high volume of often low-quality consent reports, which under the current law (because of the provisions on deemed consent) they cannot afford to ignore. At the moment, the current breadth of the money laundering offences (specifically the inclusion of acquiring and possessing criminal property) and the definition of criminal property (specifically the inclusion of “suspicion”) has led inevitably to an incentive, primarily in but not limited to the banks and others in the regulated sector, to submit SARs as a defensive measure.
The Plan proposed various additional powers (including to direct banks and other reporting entities to take various actions), as well as the wholesale abolition of the “consent regime”. The latter proposal would in practice subject assets about which there is some suspicion to an indefinite informal freeze, with those holding them having no other practical option but to hold them unless and until they are directed otherwise.
Though the latter proposal was not well defined in the Plan and seems unlikely to be acted upon, the proposal itself is alarming, as is its apparent rationale: it seems the NCA simply does not have the resources to cope with the current volume of reports, which is high and rising. The HAC report seemed to support this diagnosis, with particularly stinging criticism reserved for the software used by the NCA to process reports, whose failure it said had “made the SARs system a futile and impotent weapon in the global fight against money laundering and corruption”.
Instead of abolition, the Bill proposes a facility to apply to court to extend the moratorium period, where it is satisfied that an investigation is being conducted “diligently and expeditiously”, that further time is needed, and that an extension is “reasonable in all the circumstances”. Importantly, the provisions would enable the moratorium period to be extended not just once, but a maximum of six times, each lasting another 31 calendar days.
While it is clearly essential to give the authorities enough time to make a decision on how to proceed, it should be noted that the thresholds for freezing assets under the civil or criminal processes in POCA are quite low, and so the scenario under discussion is where the investigators have no good arguable case that they represent the proceeds of crime, and no reasonable basis to suspect that they belong to a person who has benefited from crime. In circumstances where banks are understandably keen to submit SARs on often flimsy grounds, and the NCA and investigators are chronically under-resourced, there seems a very real prospect of inconvenience and injustice to people whose access to assets is effectively blocked for nearly two-thirds of a year. While the oversight of the court is welcome, it should be noted that people affected can be excluded from the relevant hearings, and/or denied access to information on which the investigators rely.
(xiv) The Fourth Anti Money Laundering EU Directive (“4MLD”)
Whilst businesses need to be concerned primarily with understanding and effectively implementing the AML Provisions as discussed in this chapter, they should also have an understanding of the matters contained in the 4MLD which requires the UK to update its AML provisions and transpose the new requirements into local law by 26 June 2017.
The 4MLD enhances the obligations already imposed by the AML Provisions, on all member states, including customer due diligence (both simplified and enhanced) and the importance of keeping written records of the risk assessments carried out in relation to those customers in relation to money laundering risk. It puts a renewed emphasis on employing a risk-based approach to money laundering at all levels of business and directs states to commission national risk assessments. At the more practical level, it adds new categories of business to the regulated sector (including virtual currency providers, for example), and broadens the definition of PEPs to include domestic politicians, their relatives and associates – a move that UK politicians have been keen to stress should not be taken to imply that they are necessarily high risk customers. Taking a step back, the direction of travel is clearly towards stricter and broader obligations on the regulated sector, so that the risks discussed above are likely to become greater over time.
The AML Provisions serve to effectively deny money launderers access to legitimate financial services and impose harsh sanctions on those who are found to have neglected their responsibilities under the legislation. Whilst POCA provides the opportunity for businesses and individuals to mount a valid defence against allegations of participation in money laundering offences by virtue of the SARs regime, the making of such reports should not be seen as a substitute for the adoption of adequate customer due diligence provisions and proactive risk management. An appreciation of the guidance issued to complement the provisions makes it clear that the best insurance against allegations of breaching the AML Provisions is to ensure that the business is able to effectively demonstrate the real-life application of the AML Provisions through the implementation of appropriate policies and procedures according to the specific money laundering risks posed to an individual business; as well as the ongoing monitoring of the effectiveness of those controls. The legal framework in relation to money laundering is currently in a state of flux and the proposed ground-breaking changes represented by the 4MLD need to be understood (and in due course, will need to be applied) by those already caught by the AML Provisions.
1. [2014] EWCA Crim 1680.
2. It is clear that the difficulty facing those drafting the anti-money laundering legislation is that money laundering is almost inevitably an international offence (the cross-border element is clearly used as an effective device in disguising the origin of the funds).
3. Outside of the regulated sector the offence of “tipping off” is mirrored by s.342 (2) POCA, i.e. “prejudicing a confiscation, civil recovery or money laundering investigation, if the person making the disclosure knows or suspects that an investigation is being, or is about to be conducted”.
4. See also the FCA Handbook in “Senior Arrangements, Systems and Controls”(“SYSC”) at Chapter 6.
5. A “PEP” generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold. There are therefore obvious links between anti money laundering legislation and anti-corruption legislation.
6. See POCA Sections 335 and 336.
7. It is crucial that during this period nothing is said or done which could be interpreted as “tipping off” the subject of the SAR, which constitutes a separate (secondary) offence as described above re “Criminal Offences created under POCA” under section 342 POCA.
8. Businesses or individuals who are based in countries which are subject to international sanctions or who appear on the Transparency International Corruption Index may pose a higher money laundering risk, for example.
9. See Theresa May’s statement made on 21 April 2016 as part of the London Anti-Corruption Summit: https://www.gov.uk/government/news/biggest-reforms-to-money-laundering-regime-in-over-a-decade.