Act now on money laundering

The Second European Money Laundering Directive will be implemented in mid-June - and solicitors must understand the implications, writes Alison Matthews

Last year, the Law Society's money laundering and serious fraud task force warned solicitors about the impact of the Proceeds of Crime Act 2002 (POCA) (see [2002] Gazette, 12 September, 26).

That warning is now even more relevant as the money laundering provisions of the Act came into force on 24 February 2003 and solicitors are realising how this legislation affects their work and their clients.

In addition, the Money Laundering Regulations 2003, will come into force by mid-June 2003, implementing the Second European Money Laundering Directive.

Failure to understand the new legislation leaves solicitors and their employees vulnerable to investigation and prosecution.

The Law Society issued guidance in February and September 2002, including a new warning card.

Now solicitors can take further steps towards protecting their practices.

Money laundering

The offences, which apply to all solicitors, are:

- Concealing, disguising, converting, transferring criminal property or removing criminal property from the UK;

- Entering into or becoming concerned in an arrangement which a firm knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person;

- Acquiring, using or possessing criminal property.

The Terrorism Act 2000 offences are similar.

Property is criminal property if: it constitutes a person's benefit from any criminal conduct or represents such a benefit (in whole or in part and whether directly or indirectly); and the alleged offender knows or suspects that it constitutes or represents such a benefit.

Solicitors who turn a blind eye and do not ask questions if they have concerns are unlikely to persuade a jury that they did not know or suspect.

It does not matter who carried out the conduct, who benefited from it or whether the conduct occurred before or after the passing of POCA.

Remember that overseas activities are caught if they would constitute an offence in the UK.

Being involved in the transfer of the proceeds of tax evasion, benefit fraud, drug trafficking or immoral earnings into a trust or company or to another person, knowing or suspecting that the money is the proceeds of criminal conduct, will be an offence unless one of the defences is available.

Defences

The key defences are:

- Making an authorised disclosure and obtaining appropriate consent before carrying out the prohibited act, for example, the transfer;

- Making an authorised disclosure after the transfer as long as you had good reason not to disclose before, the disclosure is made on your own initiative and as soon as practicable; or

- Having a reasonable excuse not to have made a disclosure.

There is also the adequate consideration defence which relates to the acquisition, use or possession of criminal property provided that you do not know or suspect that your goods or services may help another to carry out criminal conduct.

Appropriate consent

If solicitors' firms make a 'pre-transaction' authorised disclosure to the National Criminal Intelligence Service (NCIS), then they need 'appropriate consent' before they can proceed.

If firms do not receive a notice telling them not to proceed within seven working days of the disclosure, then they can proceed.

If firms receive a notice refusing consent to proceed, then the law enforcement authorities have up to 31 days in which to obtain a restraint order.

In practice, if completion is due in 24 hours, you cannot wait for seven days for the answer.

You should disclose to NCIS on a fast-track basis, by fax.

Remember you can contact NCIS for a progress report.

The form can be downloaded from: www.ncis.gov.uk/disclosure.html.

Failure to disclose

This offence applies if:

- You know or suspect or have reasonable grounds to know or suspect that someone is laundering the proceeds of any criminal conduct; and

- You receive the information in the course of business in the regulated sector; and

- You do not make a disclosure to NCIS.

The regulated sector will, by mid-June 2003, cover most practice areas, for example, conveyancing, corporate, trust, transactional and family work.

Solicitors within the regulated sector will then have to verify the identity of all relevant clients.

'Reasonable grounds' raises a number of issues:

- What is reasonable? A court with the benefit of hindsight may disagree with your approach;

- What about incompetence or oversight? The joint money laundering steering group guidance is helpful in dealing with these issues.

There are some defences, for example, when information comes to you in privileged circumstances.

Also employees have a defence if they did not know or suspect that someone is engaged in money laundering and their employer did not train them.

Law firm partners will be in breach of the money laundering regulations if they do not train staff.

Tipping off

There is also the tipping-off offence.

This applies if you know or suspect that an internal or external report has been made and by telling your client or a third party, you might prejudice any investigation.

Preliminary enquiries of a client to obtain more information, to confirm identity, to clarify the source of funds will not give rise to a tipping-off offence unless you know or suspect that a report has been made.

MLRO offences

Some new offences are specifically aimed at money laundering reporting officers (MLROs).

Those solicitors who are reporting officers should ensure that they understand them.

The new legislation has enormous implications for solicitors, but the Law Society's new guidance, currently being drafted, will help.

Partners must ensure that someone is responsible for understanding the legislation (POCA and the Terrorism Act 2000) and for training staff on the law and their responsibilities.

The Society's task force anticipates a busy time ahead as problems and concerns are exposed by the new legislation and as we raise and discuss those issues with the relevant authorities.

Alison Matthews is a compliance officer at Sheffield-based law firm Irwin Mitchell and a member of the Law Society's money laundering and serious fraud task force