Blog

12 December 2018

Getting tough on reporting money laundering and sanctions breaches

Categories: Blog, Financial Crime,

Peter Bowles Oct 2018 web

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

cb-web__0006_david-corker_6541_final-jpg

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

cb-web__0004_claire-cross_6496_final-jpg

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

By Sangeeta Bedi

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Categories: Blog, Financial Crime,

Anna Rothwell

Categories: Blog, Financial Crime,

At the recent launch of the multi-agency National Economic Crime Centre (“NECC”) on 31 October 2018, Ben Wallace, the Minister of State for Security, declared a crackdown on “professional facilitators” of money laundering and sanctions offences. As well as estate agents, public schools, football clubs and luxury car dealers, legal professionals are now under increasing scrutiny for failing to report money laundering and sanctions breaches. In addition to providing funding of £48m for the NECC increased officers at the National Crime Agency (“NCA”), Mr Wallace spoke of the need to go after “the people who have not played their part in hardening the environment and reporting.”

The perceived need for greater enforcement action is unsurprising. There have been relatively few prosecutions for failing to report money laundering since the offences contained in the Proceeds of Crime Act 2002 (“POCA”) entered into force.[1] Nor have there been any reported prosecutions for failing to comply with financial sanctions reporting requirements since they were extended in August last year.

In light of this scarcity of prosecutions, how are the offences of failure to report money laundering and sanctions breaches interpreted in practice, and what are the proposals for reform?

Failure to report money laundering

In evidence to the Treasury Committee on Economic Crime on 30 October 2018, Mr Wallace spoke of his desire to increase prosecutions of those who fail to report money laundering.  He stated that a prosecution of a “county solicitor” or regional estate agent would have a ripple effect, resulting in the collapse of firms or a change in their behaviour. In addition, at the launch of the NECC, Mr Wallace highlighted the fact that banks are responsible for 83% of suspicious activity reports (“SARs”), arguing that estate agents and lawyers in particular had more to do in the fight against economic crime. On its face, the statistics bear this out: legal professionals submitted less than 1% of the total number of SARs submitted to the NCA in 2017.

But it is questionable whether the Government is drawing the right conclusions from these statistics. The focus should be on the quality of SARs rather than the quantity. As the Law Commission highlighted in their consultation paper on the SAR regime earlier this year, while the legal profession does not produce the same volume of SARs as the banking sector, those submitted by legal professionals are likely to be more complex in nature, as well as of a higher quality. In other words, precisely the type of SAR which provides vital sources of intelligence. In contrast, enforcement agencies concede that they are struggling with a significant number of low quality SARs produced by banks and other financial institutions (on average, 2,000 SARs are received per working day). Many of these SARs are unnecessary, of little practical effect, or simply of poor quality, which means that essential resources are diverted.

But it would be wrong to lay the blame solely at the door of the banks and financial institutions. The way in which the failure to report money laundering offences in sections 330-332 of POCA are currently drafted encourages high volumes of defensive reports. Focusing on section 330 (as sections 331 and 332 apply only to nominated officers, a relatively narrow group of individuals), a person commits an offence if:

  • he or she “knows or suspects”, or has “reasonable grounds for knowing or suspecting”, that another person is engaged in money laundering;
  • the information on which his suspicion is based comes in the course of business in the regulated sector; and
  • he or she fails to disclose that knowledge or suspicion, or reasonable grounds for suspicion, as soon as practicable to a nominated officer or the NCA.

 

The obligation to disclose information in relation to a customer or client under threat of criminal sanction is both onerous and unusual. Onerous because suspicion is such a low threshold, and unusual because English criminal law imposes very few positive obligations to report crime (terrorism is the only other example). In practical terms, the low threshold of suspicion means that those in the regulated sector must be vigilant at all times and report in high volume for fear of committing an offence. Moreover, the low threshold arguably requires only minimal effort – there is no need to enquire too closely once suspicion is established.

The high volume of reports is also a result of the ambiguity of the term “suspicion”. This firm regularly provides advice to solicitors through the Law Society’s Anti-Money Laundering Directory. The most frequent question we are asked is “am I right to be suspicious?” There is rarely a straightforward answer. Partly this is because there remains no definitive judgment on the meaning of “reasonable grounds for suspecting”. It is widely accepted that the threshold of “reasonable grounds to suspect” is not a subjective suspicion on objective grounds; it is a purely objective test. In other words, the offence is committed if a person should have suspected money laundering; they do not actually need to have held the suspicion themselves.  It criminalises those who may not have noticed what a Court may regard with the benefit of hindsight as reasonable grounds to suspect money laundering was taking place.

In its analysis of these provisions, the Law Commission cite the Hansard reports of the debates on the Proceeds of Crime Bill as support for the view that the failure to disclose offences were intended to include a wholly objective test for criminality, precisely in order to encourage the reporting of money laundering. The unforeseen consequence is that the legislation has encouraged the over reporting of suspicions, rather than a realistic evaluation of risk.

In light of these difficulties, the Law Commission conclude that there is a strong argument that a solely objective test sets the threshold for liability too low.  They recommend retaining the current wording of section 330, requiring an individual to have either knowledge or suspicion, or alternatively reasonable grounds for either knowledge or suspicion, but consider that the phrase “reasonable grounds for suspicion” should be interpreted in line with the House of Lords case of R v Saik[2]This case considered the wording of section 93C(2) of the Criminal Justice Act 1993 (the forerunner of POCA), which was “knowing or having reasonable grounds to suspect that any property is the proceeds of criminal conduct”. In Saik, their Lordships concluded that proof of suspicion is not enough:  “it must be proved that there were reasonable grounds for the suspicion. In other words, the first requirement contains both a subjective part — that the person suspects — and an objective part— that there are reasonable grounds for the suspicion.”[3]  The Saik interpretation of “reasonable grounds to suspect” has been widely understood as a cumulative test, incorporating both subjective and objective elements.  It requires a defendant to be proved to have actually suspected that the property was criminal in order to be convicted, and for that suspicion to be based on objective grounds.

If this interpretation of “reasonable grounds to suspect” were to be adopted, the Law Commission believe that it is likely that the number of low value and defensive SARs would be reduced, as it would promote a more evidence based approach to their submission. This is particularly important in light of the impact that a SAR can have on its subject, an impact exacerbated by the new power to extend moratorium periods in the Criminal Finances Act 2017.

While this interpretation, if adopted, would make the submission of SARs more onerous in the short term, as it places the onus on the person reporting their suspicion to have grounds that are objectively justifiable, in the long term it should lead to fewer and more focused reports of a higher quality.  In order to reduce the burden on the regulated sector, the Law Commission also recommend that POCA is amended to include a statutory requirement that the Government produce guidance on the suspicion threshold, along the lines of that already published in relation to the Bribery Act 2010 and Criminal Finances Act 2017.

Failure to report sanctions breaches

Since 8 August 2017, if lawyers and other professionals, including accountants, auditors, tax advisors, estate agents, trust or company service providers, fail to report known or suspected sanctions breaches to HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”), they commit a criminal offence under the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (see https://www.corkerbinning.com/new-regulations-tighten-financial-sanctions-grip/ for an outline of this offence).

The recent entry into force of the majority of the provisions in the Sanctions and Anti Money Laundering Act 2018 (“SAMLA”) on 22 November 2018 gives the Government the ability to significantly broaden sanctions reporting obligations by way of ministerial “Henry VIII” powers post-Brexit.  The wide-ranging use of such powers has been the cause of some controversy.  The entry into force of SAMLA is also earlier than anticipated, as it was not expected to come into force until the date of the UK’s exit from the European Union in March 2019.

SAMLA 2018 permits the introduction of far-reaching reporting obligations by way of secondary legislation, extending the existing reporting requirements to all natural and legal persons, and not just the lawyers and other professionals who currently bear this obligation.  This dramatically extends the scope of the criminal offence to a far wider range of subjects.  Ironically for an Act of Parliament which was originally intended to maintain the status quo after Brexit, it in fact extends UK law to bring it into line with existing reporting obligations provided for under EU law, breach of which has not to date been a criminal offence.

The explanatory notes for SAMLA 2018 confirm that these powers, if enacted, are intended to be used to require people to report cases where they become aware or have reasonable grounds to suspect they are dealing with a designated person or a designated person has committed an offence.  This is the same test as has applied since August 2017 to lawyers and other professionals. The current OFSI guidance explicitly confirms that “reasonable grounds to suspect” refers to an objective test that asks whether there were factual circumstances from which an honest and reasonable person should have inferred knowledge or formed the suspicion. This again means an individual may be found guilty in circumstances where they did not actually suspect an offence may have occurred. However, in comparison to the tidal wave of SARs engulfing the NCA, relatively few sanctions breaches were reported to OFSI (in April 2017 to March 2018 OFSI received 122 reports of suspected breaches). The need to reduce the number of low quality reports is therefore less of a priority.

 

Conclusion

It remains to be seen if the declared crackdown on professionals will result in an increase in the number of investigations and successful prosecutions of those professionals (particularly lawyers) who allegedly facilitate transactions without reporting their suspicions. The Government is right to expect professionals to play a vital role in reporting their suspicions, but the current deluge of low quality reports simply overwhelms enforcement agencies and enables criminals to slip through the net. It is too easy to respond to this deluge by pouring greater resources into enforcement. The right response is to promulgate better guidance and interpretation from Government and the appellate courts, so that those burdened with the obligation to report have clarity and do not produce low quality reports generated from a fear of being exposed to criminal liability. The proposed change to the threshold of suspicion coupled with statutory guidance would help relieve that burden.  In addition, the current criminal penalty for a failure to report sanctions breaches should not be extended to include all individuals and companies; rather, the Government should read across the conclusions of the Law Commission on the failure to report money laundering offence, and retain the reporting obligation on regulated professionals alone.

[1] Between 2013 and 2016, only 58 cases were prosecuted to trial under section 330 of POCA. A further 1,358 cases resulted in a criminal investigation but did not proceed to a trial.

[2] [2006] UKHL 18, [2007] 1 AC 18.

[3] [2006] UKHL 18; [2007] 1 AC 18, Lord Hope at para 53.

This article was published in CrimeLine and Thomson Reuters Accelus and can be accessed here and here respectively.

TwitterLinkedInEmail