money laundering : Justin Nelson Commercial Solicitor

Money laundering and the proceeds of crime

The government has recently introduced tough new rules to crack down on money laundering and the proceeds of crime. The new rules affect a wide range of people, perhaps including you or your organisation

Money laundering - significant changes to what this means

Most of us imagine money launderers to be criminals involved in drug trafficking or terrorism or to be someone like Al Capone. However new legislation has expanded significantly the definition of what we might have traditionally considered as money laundering. While the general principles remain; money laundering involves turning the proceeds of crime into apparently 'innocent' funds with no obvious link to their criminal origins, what has changed is that the definition now includes the proceeds of any criminal offence, regardless of the amount involved.

The new legislation and why it has been introduced

The two key pieces of legislation are the Proceeds of Crime Act 2002 (The Act) and the Money Laundering Regulations 2003 (The Regulations). The Act re-defines money laundering and the money laundering offences, and creates new mechanisms for investigating and recovering the proceeds of crime. The Act also revises and consolidates the requirement for those affected to report knowledge, suspicion or reasonable grounds to suspect money laundering. See the panel below for some of the more technical terms of the Act. The Regulations contain the detailed procedural requirements for those affected by the legislation. In the main, the new Regulations come into force on 1 March 2004.

Certain businesses have been affected by anti-money laundering requirements for some time, for example, banks and other financial institutions. These businesses have been required to put in place specific arrangements to prevent and detect money laundering. The new regime requires many more businesses to introduce procedures to combat money laundering and the criminal activity that underlies it. As money launderers have resorted to more sophisticated ways of disguising the source of their funds, new legislation aimed at catching those involved has become necessary.

Technical terms

Under the Act, someone is engaged in money laundering if they:

conceal, disguise, convert, transfer or remove (from the United Kingdom) criminal property
enter into or become concerned in an arrangement which they know or suspect facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person or
acquire, use or have possession of criminal property.

Property is criminal property if it:

constitutes a person's benefit in whole or in part (including pecuniary and proprietary benefit) from criminal conduct or
represents such a benefit directly or indirectly, in whole or in part and
the alleged offender knows or suspects that it constitutes or represents such a benefit

Who is caught by the new legislation?

The legislation relates to anyone in what is termed as the 'regulated sector', which includes but is not limited to:

accountants and auditors
bureau de change
casinos
company formation agents
dealers in high value goods (including auctioneers) whenever a transaction involves accepting a total cash payment equivalent to 15,000 Euros (around £10,000) or more
estate agents
insolvency practitioners
legal advisers, including solicitors
some management consultancy services
tax advisers

The implications of being in the regulated sector

If your business is caught by the definition, you may have already received guidance from your professional or trade body, but please speak to me if you want to discuss in more detail how the requirements of the Regulations may affect you. If you are affected, you must comply with the new laws or face the prospect of criminal liability (both fines and possible imprisonment).

Those businesses that fall within the definition are now required to establish procedures to:

confirm the identity of new clients
appoint a Money Laundering Reporting Officer (MLRO) to whom money laundering reports must be made
establish systems and procedures to forestall and prevent money laundering and
provide relevant individuals with training on money laundering and awareness of their procedures in relation to money laundering

Procedural changes

In your dealings with any business that is affected by the new legislation. you may soon notice a few procedural changes. For example, in common with banks and other financial institutions, solicitors and accountants will be required to verify the identity of new clients with effect from 1 March 2004. This will most likely involve seeing and taking copies of photographic identification such as a passport or new style driving licence and a copy of a recent utility bill. These are needed to establish both an individual's identity and current address. For companies or charities, the identity of that organisation itself must be established, perhaps by checking records at Companies House or at the Charity Commission. In addition, the personal identities and addresses of those controlling the organisation must be established in the same way as for individuals. The law requires these records to be maintained for five years after a client relationship has ended.

For existing clients at 1 March 2004, while there is no specific requirement to verify identity, this may sometimes be necessary; for example, where a new director or shareholder or a new partner is introduced into a company or partnership respectively.

The definition of money laundering has been extended to include the proceeds of any crime. Those in the regulated sector are required to report knowledge or suspicion (or where they have reasonable grounds for knowing or suspecting) that a person is engaged in money laundering; ie: has committed a criminal offence and has benefited from the proceeds of that crime. These reports are made first to the MLRO, who decides whether or not to pass the report on to the National Criminal Intelligence Service (NCIS).

National Criminal Intelligence Service (NCIS)

NCIS is a government body that works on behalf of all UK law enforcement agencies in the fight against serious and organised crime. NCIS has an Economic Crime Branch and its most important function is to analyse the suspicious activity reports (SARs) that it receives from those in the regulated sector and disseminate this information to the relevant law enforcement agency.

The Regulations require those in the regulated sector to report all suspicions of money laundering to NCIS. To assist in dealing with the volume of reports and inputting to their database, NCIS has designed a standard reporting template, which is available on their website ( www.ncis.gov.uk ), upon which they prefer reports to be made.

By acting as a coordinating body, NCIS collates information from a number of different sources. This could potentially build up a picture of the criminal activities of a particular individual, which only become apparent when looked at as a whole. This information can then be passed on to the relevant authorities to take action.

Is your business vulnerable?

Criminals are constantly searching for new contacts to help them with their money laundering. Certain types of business are more vulnerable than others. For example, any business that uses or receives significant amounts of cash can be particularly attractive. To counter this, the Regulations now require businesses that deal in goods and accept cash equivalent to €15,000 (around £10,000) to register with Customs and Excise and implement anti-money laundering procedures. If you think that your business may be affected you can find out more under High Value Dealers on the last two pages of this bulletin.

You can imagine that if a drug dealer went along to a bank on Monday morning and tried to pay in the weekend's takings, the bank would notice it and report it unless the sum was relatively small. If criminals can find a legitimate business to help them by taking the cash and pretending that it is the business's money being paid in (in exchange for a proportion!), then that business can put the cash into the bank without any questions being asked.

Take for example the mobile telephone business that has had a fairly steady turnover of £10,000 per week for the last couple of years but suddenly begins to bank £100,000 in cash each week. Without a clear, rational and plausible explanation, this type of suspicious activity would clearly be reported to NCIS.

However perhaps a less obvious example of possible money laundering could be where an individual comes into an antiques shop and offers to buy a piece of furniture for £12,000 in cash. Not too many sellers would have insisted upon a cheque in the past! This person may be a money launderer who then goes to another shop and sells the antique for say £9,000, being quite prepared to suffer the apparent loss. This time the criminal asks for a cheque that can then be paid innocently into a bank account, making the money look legitimate. The new legislation aims to put a stop to this type of activity. Those in the regulated sector are required to report any transactions that they have suspicions about.

Reporting suspicions of money laundering under the new regime

However it is not simply the more obvious examples of suspicious activities that have to be reported. The government has insisted upon there being no de minimis limits within the legislation. This means that very small proceeds of crime have to be reported to NCIS. There are thousands of criminal offences in the United Kingdom which, if committed, are likely to result in a person benefiting from an offence and thereby having criminal property. The two examples below illustrate the extent of the new legislation.

A criminal offence? Overpayments

What would you do where you received an overpayment perhaps against a sales ledger invoice?

Would you inform your customer, be they a multi-national company or a sole trader, or send the money back? Or would you leave the money sitting in your bank account and on the ledger until the customer asked for it? After a couple of years would you write the overpayment off and treat the money as your own?

Depending upon the circumstances, if you were to write the overpayment off, do you think that this act could be construed as theft? The very act of writing off the overpayment could be a criminal offence, from which you have benefited.

If in the course of their business with you, this comes to the attention of someone in the regulated sector, they would be required to report any suspicion that they had that you had committed a criminal offence. Without a de minimis limit it would not matter whether the amount involved was £2 or £2,000,000.

Tax evasion

Deliberate tax evasion is likely to be regarded as a criminal offence (of cheating the public revenue). For example, not correcting an error such as claiming input VAT back on a company car when the error is discovered. If the decision not to correct the error results in tax that should be paid going unpaid or a repayment that was not due being made, this is likely to be a reportable offence under the new regime.

Do note however that making an error is not itself a criminal offence! It is the decision not to rectify the error that gives rise to the intention to evade tax. In the example below, if an overpayment has been received from the Inland Revenue and there have been no steps to notify the relevant tax authority, this could constitute a criminal offence and trigger the reporting procedures.

Tipping off

There is also an offence known as 'tipping off' under the Act. This is what would happen if a person in the regulated sector were to reveal that they knew or thought that a suspicious activity report had been made, say for example, to their customer or client. Where this disclosure would be likely to prejudice any investigation by the authorities, an offence may be committed. As you can imagine, if you were to ask an accountant or estate agent whether they had made any reports about you, they would not be able to discuss this with you at all. If they did, they could break the law and could face a fine or up to five years imprisonment or both.

The new legislation brings a number of professions and businesses into the regulated sector. Complying with the requirements of both the Act and the Regulations requires those affected to introduce a number of new procedures to ensure that they meet their legal responsibilities. If you would like to discuss how the new legislation could affect you and your organisation please do contact me.

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