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Money Laundering

money laundering law

Overview of Money Laundering Legislation

The Money Laundering Regulations (Money Laundering Regulations 2003, SI 2003/3075) were made in order to prevent the use of the financial system for the purposes of money laundering. The Regulations give effect to EEC Council Directive 91/308 on prevention of the use of the financial system for the purpose of money laundering (OJ L166, 28.6.91, p 77), as amended by European Parliament and Council Directive 2001/97/EC (OJ L344, 28.12.2001, p 76). They came into force as follows:
  • regulation 10 in so far as it relates to a person who acts as a high value dealer, on 1st April 2004;
  • regulation 2(3)(h), on 31st October 2004;
  • regulation 2(3)(i), on 14th January 2005;
  • all other regulations, on 1st March 2004.

Only persons carrying on "relevant business" are affected by the Act. A relevant business includes (Regulation 2(2)):

  • the regulated activity of:-
    • accepting deposits;
    • effecting or carrying out contracts of long-term insurance when carried on by a person who has received official authorisation pursuant to Article 4 or 51 of the Life Assurance Consolidation Directive;
    • dealing in investments as principal or as agent;
    • arranging deals in investments;
    • managing investments;
    • safeguarding and administering investments;
    • sending dematerialised instructions;
    • establishing (and taking other steps in relation to) collective investment schemes;
    • advising on investments; or
    • issuing electronic money;
  • the activities of the National Savings Bank;
  • any activity carried on for the purpose of raising money authorised to be raised under the National Loans Act 1968 under the auspices of the Director of Savings;
  • the business of operating a bureau de change, transmitting money (or any representation of monetary value) by any means or cashing cheques which are made payable to customers;
  • any of the activities in points 1 to 12 or 14 of Annex 1 to the Banking Consolidation Directive (which activities are, for convenience, set out in Schedule 1 to these Regulations) when carried on by way of business, ignoring an activity falling within any of sub-paragraphs (a) to (d);
  • estate agency work;
  • operating a casino by way of business;
  • the activities of a person appointed to act as an insolvency practitioner within the meaning of section 388 of the Insolvency Act 1986 or Article 3 of the Insolvency (Northern Ireland) Order 1989;
  • the provision by way of business of advice about the tax affairs of another person by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual;
  • the provision by way of business of accountancy services by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual;
  • the provision by way of business of audit services by a person who is eligible for appointment as a company auditor under section 25 of the Companies Act 1989 or Article 28 of the Companies (Northern Ireland) Order 1990;
  • the provision by way of business of legal services by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual and which involves participation in a financial or real property transaction (whether by assisting in the planning or execution of any such transaction or otherwise by acting for, or on behalf of, a client in any such transaction);
  • the provision by way of business of services in relation to the formation, operation or management of a company or a trust; or
  • the activity of dealing in goods of any description by way of business (including dealing as an auctioneer) whenever a transaction involves accepting a total cash payment of 15,000 euro or more.

According to Regulation 2(3), the above does not apply to:

  • the issue of withdrawable share capital within the limit set by section 6 of the Industrial and Provident Societies Act 1965 by a society registered under that Act;
  • the acceptance of deposits from the public within the limit set by section 7(3) of that Act by such a society;
  • the issue of withdrawable share capital within the limit set by section 6 of the Industrial and Provident Societies Act (Northern Ireland) 1969 by a society registered under that Act;
  • the acceptance of deposits from the public within the limit set by section 7(3) of that Act by such a society;
  • activities carried on by the Bank of England;
  • any activity in respect of which an exemption order under section 38 of the 2000 Act has effect if it is carried on by a person who is for the time being specified in the order or falls within a class of persons so specified;
  • any activity (other than one falling within sub-paragraph (f)) in respect of which a person was an exempted person for the purposes of section 45 of the Financial Services Act 1986 immediately before its repeal;
  • the regulated activities of arranging deals in investments or advising on investments, in so far as the investment consists of rights under a regulated mortgage contract;
  • the regulated activities of dealing in investments as agent, arranging deals in investments, managing investments or advising on investments, in so far as the investment consists of rights under, or any right to or interest in, a contract of insurance which is not a qualifying contract of insurance; or
  • the Official Solicitor to the Supreme Court when acting as trustee in his official capacity.

Persons carrying on a relevant business must:

(1) comply with requirements relating to identification procedures, record-keeping procedures, and internal reporting procedures (Regulation 3(1)(a)). The identification procedures are detailed at Regulation 4; and the circumstances where it is not necessary to obtain evidence of any person's identity are detailed at Regulation 5. Particular provisions are made in relation to the identification of persons before they are allowed to use a casino's gaming facilities at Regulation 8. The record-keeping procedures are at Regulation 6 and internal reporting procedures at Regulation 7.

(2) establish such other procedures of internal control and communication as may be appropriate for the purposes of forestalling and preventing money laundering (Regulation 3(1)(b)); and

(3) take appropriate measures so that employees are made aware of the relevant provisions (i.e. the provisions of the Money Laundering Regulations 2003, SI 2003/3075, the Proceeds of Crime Act 2002 Pt 7 (ss 327–340), and the Terrorism Act 2000 ss 18, 21A (s 21A as added)), and are given training in how to recognise and deal with transactions which may be related to money laundering (Regulation 3(1)(c)).

Contravention of these provisions is an offence (Regulation 3(2)) and a person guilty of such an offence is liable: (1) on conviction on indictment, to imprisonment for a term not exceeding two years, to a fine, or to both;(2) on summary conviction, to a fine not exceeding the statutory maximum: see Regulation 3(2). The 'statutory maximum' is the prescribed sum within the meaning of the Magistrates' Courts Act 1980 s 32 (as amended): see the Interpretation Act 1978 s 5, Sch 1 (definition added by the Criminal Justice Act 1988 s 170(1), Sch 15 para 58).

Provision is made in the Regulations for the registration and inspection of money service operators and high value dealers (Regulations 9 - 25). The meanings of 'money service operator' and 'high value dealer' are at Regulation 2(1).

Supervisory authorities, which include (inter alios) the Financial Services Authority and the Bank of England, must disclose relevant information to the police if they know or suspect that someone has or may have been engaged in money laundering (Regulation 26).The Financial Services Authority has as one of its objectives the reduction of financial crime (see Financial Services and Markets Act 2000 s 2(2)) and the Authority may make rules in relation to the prevention and detection of money laundering (Financial Services and Markets Act 2000 Section s 146). There are also statutory provisions penalising those who assist in the retention of the proceeds of drug trafficking or criminal conduct and requiring banks and their employees to report suspicions or beliefs of money laundering to the police (Proceeds of Crime Act 2002 Pt 7). Anti-terrorism legislation has been enacted to prevent the retention or control of terrorist property, including money (Terrorism Act 2000).

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Recent Journals (abstracts)

New Law Journal 156 NLJ 1462 29th September 2006
Laundered and tailored policy?
Simon Young reviews the government's suggestions for the implementation of the Third Money Laundering Directive
The UK government has published Implementing the Third Money Laundering Directive: a Consultation Document, July 2006. It is obliged to introduce domestic law in compliance with the Third Money Laundering Directive 2005/60/EC (the directive)—on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing—by 15 December 2007. The current consultation is on the principles underlying the proposed approach to implementation; the deadline for responses is 20 October 2006. In the preamble, the government is at pains to point out that it does not intend to “gold plate” the implementation, which may come as a surprise to those acquainted with the introduction of the Second Money Laundering Directive 2001/97/EC via the Proceeds of Crime Act 2002, and the Money Laundering Regulations 2003 (SI 2003/3075) (the 2003 regulations). It claims to be devoted to a high-level, risk-based approach, which leaves as much regulatory discretion as possible to individual businesses. Time will tell.

New Law Journal 156 NLJ 1120 14th July 2006
The end of the affair?
Gary Grant
A recent House of Lords' decision (R v Saik) means fewer money laundering cases will be prosecuted as conspiracies. Gary Grant explains
The avalanche of draconian legislation in recent years and the establishment of powerful agencies to stem the illicit flow of “dirty money” has not only led to legal practitioners coming out in cold sweats when faced with the dilemma of whether they are compelled to inform on their clients, it has also led to a dramatic rise in money laundering prosecutions.
Prosecutions often focus on large-scale operations involving several defendants with different levels of involvement and varying degrees of knowledge about the money's source. The substantive criminal offences, which previously resided in several Acts, have now been modified and replaced by the Proceeds of Crime Act 2002, Pt 7. In summary, a person is guilty of an offence if he enters into an arrangement which he knows or suspects facilitates the acquisition, retention, or control of criminal property.

Tax Journal, Issue 843, 21 26th June 2006
The Community's Approach to VAT fraud
Jason Collins
The European Commission believes that not enough is being done by Member States to help each other prevent tax fraud across the EU. As part of a series of initiatives dating back to 2004 the Commission has issued a Communication (reference 2006(254)), the objective of which is to 'launch a debate with all the parties concerned on the different elements to be taken into account in an “anti-fraud” strategy at European level'.
The Commission believes that more should be done to tackle tax fraud at Community level, since tax fraud — particularly VAT fraud — is increasingly likely to have a cross-border dimension. The European Commission notes that the existing legal framework for administrative co-operation in relation to VAT fraud is satisfactory but the provisions are not in practice always used as extensively or productively as they could be. The first part of this article will summarise the current administrative cooperation and information exchange provisions and the Commission's proposals as to how co-operation could be improved. The second part will look at the sources of the information which is likely to pass through information exchange gateways, with a particular emphasis on the anti-money-laundering regime. The article concludes, in Part 3, with a review of the Commission's comments on changes that may be made to the VAT system to remove structural weaknesses which are exploited for fraud.

Tax Journal, Issue 836, 9 8th May 2006
Offshore Arrangements under Siege
There is nothing new in HMRC's special interest in, not to say concern about, any offshore arrangements entered into by any taxpaying entity resident in the United Kingdom (UK). For years the very mention in accounts or documentation of opaque structures such as 'stiftung' or 'anstalt' was sufficient to merit fairly intense scrutiny by what was then a Somerset House specialist. What is new is the extent of international co-operation between fiscal authorities, both inside and outside the European Union (EU), urged on by the finance ministers of the Group of Seven leading industrial nations and the wider membership of the Organisation for Economic Cooperation & Development (OECD). This previously unheard of degree of co-operation has manifested itself in a co-ordinated international attack on tax evasion which is, of course, a money laundering offence. The third EU Directive on the subject is not due to become part of UK law until 2007 but many of its provisions are already in existing legislation — mainly the Proceeds of Crime Act 2002.

Tax Journal, Issue 829, 11 20th March 2006
Khan v The Director of the Assets Recovery Agency
The author was Counsel in the case representing the Director.
Tamara Solecki, Tax Barrister to the Director of the Assets Recovery Agency, discusses the Special Commissioner's decision in Raja Munawar Khan v The Director of the Assets Recovery Agency
This is the second published judgment involving the Assets Recovery Agency since its inception in 2002 but in a way a much more important one from a legal point view than the first: Gary Harper v The Director of the Assets Recovery Agency1 was an assessment hearing where the Special Commissioners more or less confirmed the assessments made on the facts; the present case is different, in that it has raised a number of significant issues not only for the area of the developing law in the taxation of the proceeds of crime but also for tax law generally: four of the arguments related to the HRA 1998, one to natural justice and one to the Tribunal's jurisdiction — only the last issue was solely POCA-based.

New Law Journal 156 NLJ 345 3rd March 2006
Reporting suspicious transactions—a fine balance
Gary Summers considers the Attorney General's intervention in parliamentary debates concerning the Proceeds of Crime Act 2002
The prevailing consensus in early 2005 appeared to be that a breach of the reporting obligation under the Proceeds of Crime Act 2002 (PCA 2002), s 330 was a “thought crime”. So if a defendant was subjectively or objectively suspicious about a transaction, a prosecution could be brought without any need to prove as part of the actus reus that the failure to report in fact related to criminal property or put another way that the relevant third party was in fact “engaged in money-laundering”
The editors of Blackstone's Criminal Practice, writing in their 2004 edition, thought, “actual knowledge or suspicion is not required under s 330 or s 331, nor, apparently, need it be proved that any money-laundering took place”.
When contemplating a challenge to this established legal thinking in EG and others at Southwark Crown Court in late 2005—a substantial case involving the London arm of an established Columbian financial organisation—Blackstone's view seemed to be widespread; the contrary view appeared to be perceived as unarguable in some respected quarters.

New Law Journal 155 NLJ 1514 14th October 2005
Bowman v Fels: new guidance
Simon Young
The Law Society has updated its money laundering guidance following the instrumental Bowman v Fels decision, but a degree of mental gymnastics is still required to interpret the intricate reporting requirements, says Simon Young
The Law Society published new guidance last month on the important case of Bowman v Fels [2005] EWCA Civ 226, [2005] All ER (D) 115 (Mar). This new guidance will have a major impact upon the way in which the current legislation regarding money laundering affects firms.
The new guidance revises part of the pilot guidance issued by the Law Society's Professional Ethics Department in January 2004, entitled Money Laundering Guidance. Specifically, it replaces Annex 3 of the pilot guidance—the society's interpretation of the earlier case of P v P [2003] EWHC Fam 2260, (unreported, 8 October 2003). It should also be noted that Annex 4, ie guidance on disclosure obligations issued by the National Criminal Intelligence Service (NCIS) has been withdrawn. Paragraphs 4.55 to 4.58 are also superseded.
Firms' money laundering reporting officers (MLROs) should annotate their copies of the pilot guidance accordingly. As with the rest of the pilot guidance, the new guidance will have persuasive effect before a court but, as it has not had formal Treasury approval, a court is not obliged to follow it. The new guidance states explicitly that it is no substitute for reading the full judgment in the case.

Tax Journal, Issue 805, 11 19th September 2005
Due Diligence and Tax Risk
Aileen Barry
There has been a tenfold increase in the number of STRs received by NCIS over the last couple of years and there is no sign of the flood abating. Many of them are believed to originate from due diligence reviews. Indeed, some inspectors within HMRC have privately confessed to concerns about an information overload, of being so overwhelmed with potential leads that they cannot readily identify the most worthwhile to pursue.

New Law Journal 155 NLJ 1286 2nd September 2005
Freezing suspicious bank accounts
Peter de Verneuil Smith (counsel for the bank in the Squirrell case)
Peter de Verneuil Smith examines the recent case of Squirrell Ltd v National Westminster Bank Plc, which exemplifies the difficulties banks can face in their efforts to comply with the Proceeds of Crime Act 2002
In 2002, Squirrell Ltd opened a bank account with National Westminster Bank and began buying and selling mobile phones. In March 2005, the bank stopped operating the account and gave no reason for doing so. Squirrell claimed that the blocking of the account prevented it from carrying out its ordinary business and applied for an order that the account be “unfrozen” and the bank be made to explain its conduct.
At the hearing, held before Mr Justice Laddie (Squirrell Ltd v National Westminster Bank Plc [2005] EWHC 664 (Ch), [2005] 2 All ER 784), HM Customs and Excise (HMCE) intervened and revealed that the bank had made an authorised disclosure pursuant to s 338 of the Proceeds of Crime Act 2002 (POCA 2002) regarding the operation of the account. HMCE successfully argued that the court could not make an order for payment out of the account, because to do so would contravene the POCA 2002 regime. The conduct of the bank was held to be “unimpeachable” and proceedings were stayed until the expiry of the “moratorium period”. This decision provides a useful example of the difficulties facing banks in their efforts to comply with POCA 2002.

New Law Journal 155 NLJ 1128 22nd July 2005
Money laundering—the Third European Directive
Simon Young
It's time to revisit your systems and training, says Simon Young, as he assesses the impact of the Third European Money Laundering Directive on legal practice.
The Second European Money Laundering Directive, upon which the UK's Proceeds of Crime Act 2002 (POCA 2002) and Money Laundering Regulations 2003 (SI 2003/2075) (the 2003 regulations) are based, was itself framed in an attempt to implement the 40 recommendations of the Financial Action Task Force (FATF), a multi-national standing body appointed by the Organisation for Economic Co-Operation and Development.
In June 2003 and October 2004, the FATF published substantial amendments to those 40 recommendations. This, in turn, brought forth a Third European Directive (2004/0137) to implement the revisions. This was officially approved on 7 June 2005 by the Council of Economic and Finance Ministers. It is expected to be brought into force later this year, and will need to be implemented within two years of that date by the UK government. When in force, it will replace its two predecessors.
There were many last minute amendments to the draft, some of which addressed concerns that had been raised by the Council of the Bars and Law Societies of Europe (CCBE). The Law Society had actively associated itself with that body's objections. At the time of writing, the full final text of the Directive is not available, but anyone wishing to examine the position in detail can find the original text and look separately at the amendments (see box, below). This article looks at some of the main provisions that will affect lawyers.

New Law Journal 155 NLJ 1070 15th July 2005
Conspiracy to launder: revisited
David Corker
Hundreds of appeals against money laundering convictions could be triggered by one of the most significant decisions in criminal law this year, writes David Corker.
The judgment of the Court of Appeal in Ali and others [2005] EWCA Crim 87, [2005] All ER (D) 16 (Jun) delivered last month is likely to be one of the most significant decisions of the court in criminal law in 2005. Counsel for HM Customs and Excise prophesied that if the court decided as it did, then this would trigger hundreds of appeals against conviction, all of which would have to be upheld. It would thus undermine the success of past law enforcement efforts against money launderers. This case, in the field of money laundering, could therefore be on a par with the decision by the House of Lords in Preddy [1996] AC 815, in relation to mortgage fraud, which has achieved landmark status. In any event, the court was not deterred by the prosecutor's plea for restraint in Ali, the Court of Appeal could even have been encouraged.
Ali is also an excellent example of the court paying careful regard to the views of the legal academic community, especially when they dissent from the decisions of the appellate courts. Here, Hooper LJ—who delivered the court's judgment—declined to follow previous court authorities, explicitly adopting instead the critique of those authorities expressed by Professor Ormerod in his case note in the Criminal Law Review in April 2005.

Tax Journal, Issue 796, 13 4th July 2005
Making a Suspicious Activity Report
Jonathan Fisher
The case of Bowman v Fels 2005 EWCA Civ 226, decided by the Court of Appeal on 8 March 2005, is extremely important for tax professional advisers, because it narrows the circumstances in which professional advisers are required to make a suspicious activity report (SAR) under the anti-money-laundering legislation set out in Part 7 of the Proceeds of Crime Act 2002 (POCA). The object of this article is to consider whether Bowman v Fels impacts on the obligation of a barrister and solicitor to make a SAR when representing a taxpayer who is seeking to make a voluntary disclosure to HM Revenue & Customs (HMRC) and make a civil settlement, taking advantage of the Hansard procedure.

Taxation, 13 Jan 2005, 340 13th January 2005
Doing The Laundry
Sarah Deeks
One of the biggest changes faced by high street practitioners in the last year has been the introduction of the Money Laundering Regulations SI 2003 No 3075 (MLR 2003). Although firms providing financial services have had procedures in place to prevent their services being used for money laundering for the past ten years (since MLR 1993), the inclusion of tax offences within the definition of money laundering has caused practitioners much anxiety. Nearly a year on, there is still uncertainty about when suspicious activity reports should be sent to the National Criminal Intelligence Service (NCIS). Out of fear of facing criminal proceedings themselves, some tax practices report anything remotely suspicious or 'wrong'. At the other end of the spectrum there are firms that refuse to believe that any of their (usually longstanding) clients could ever do anything which requires reporting. In between these extremes there is a third way. By adopting good practice management systems and coherent anti-money laundering policies, firms can be confident about when they do and do not need to report.

Taxation, 6 Nov 2003, 136 6th November 2003
The Cheat, His Wife, and Her Lawyer
Jason Collins
The recent decision in P v P could mean that the tax affairs of divorcing clients might come under the close scrutiny of the Inland Revenue; Jason Collins and Alan Kennedy discuss the consequences.
In P v P, the solicitors and barristers representing the parties to the divorce became suspicious, during the course of proceedings for financial relief brought by the wife, that some of the divorcing couple's assets might represent the proceeds of the husband's earlier tax evasion. The lawyers were concerned that they might be at risk of committing criminal offences under the Proceeds of Crime Act 2002 if they were to continue acting in the proceedings, and so sought the guidance of the Court of Appeal. The Proceeds of Crime Act 2002, together with the Money Laundering Regulations 2003 (which are currently in draft, but soon to be finalised), have considerably widened the scope of the money laundering régime, which was first introduced in 1993. The régime (both old and new) applies to money laundering activity, which, very broadly, is the possession, retention, use or transfer of property that represents a person's

Journal of International Trust and Corporate Planning ITCP 10 2 (65) 1st June 2003
Solicitors Beware: Money Laundering After R v Duff
Ryan Myint
The prosecution and conviction of Jonathan Duff, the first solicitor to be jailed for the offence of failing to report a suspicion of money laundering, has stripped away any last vestiges of complacency over money laundering in the solicitors' profession. For solicitors, the most disturbing aspect of the case is that Duff was not an intentional launderer of criminal funds. Instead, Duff's crime was an act of omission, namely a failure to report, which arose from a genuine misunderstanding of his own legal obligations.

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