The Serious Organised Crime and Police Act 2005: Some common sense in the money laundering regime at last?

In our January 2005 e-bulletin we discussed a number of recent money laundering developments, including the amendments to the Proceeds of Crime Act (“POCA”) proposed by the Serious Organised Crime and Police Bill. The Bill has now received Royal Assent and this e-bulletin reviews some of the practical implications that the Serious Organised Crime and Police Act 2005 (“SOCA”) will have when it is brought into force – which will be on a date to be specified by the Secretary of State by Order.

SOCA was one of the measures pushed through Parliament before it was dissolved for the election. The Bill contained a number of other more controversial provisions, including the creation of the Serious Organised Crime Agency, new powers for law enforcement, an incitement to racial hatred offence, and restrictions on public demonstrations near Parliament. These overshadowed the amendments to POCA, which received little debate.

The relevant provisions of SOCA are in broadly the same terms as those originally proposed when it was in Bill form, and include the following changes:

1. A new defence to the main money laundering offences and the failure to report offences where the conduct generating criminal property (for the purposes of sections 327-329) or the money laundering (for the purposes of sections 330-332) took place overseas and was lawful there.
   
2. A new defence to the failure to report offences where the person making the report has no information to identify the money launderer or the whereabouts of the criminal property.
   
3. A new offence of failing to report on the required form, and other changes to reporting procedures.
   
4. A new threshold amount below which deposit-taking institutions need not seek consent to operate accounts
   
5. A change to the legal professional privilege defence for professional legal advisers.

The changes at points (1) to (3) above will impact on all regulated firms, whereas (4) will affect only deposit-taking institutions, and (5) will affect only lawyers. The changes, and our comments on them, are set out below.

1. Overseas offences

At present, POCA defines “criminal conduct” to include conduct which would have constituted an offence in the UK if it had occurred here. Similarly, “money laundering” includes acts done overseas if they would have constituted one of the main money laundering offences (the concealing, arrangements and possession offences under sections 327-329 of POCA) if they had taken place in the UK.

The effect of this ‘single criminality’ test is that it is irrelevant that the conduct generating criminal proceeds was lawful overseas. In practice the test has led to absurdities, the classic example being the Spanish bullfighter – reported for money laundering because his profession would be illegal in the UK.

SOCA alters this by introducing a new defence in the main money laundering offences and the ‘failure to report’ offences (sections 330–332 of POCA) where:

• it is known or believed on reasonable grounds that the conduct occurred outside the UK; and

• the conduct was not criminal in the country where it took place; and

• it is not of a description prescribed by the Secretary of State by Order.

It is expected that the Secretary of State will prescribe certain serious offences that must be reported regardless of whether or not they are lawful overseas.

The change is welcome so far as it goes. However, the principal difficulty is that, for the defence to apply, the conduct must actually be lawful in the overseas country – it is no defence that the MLRO mistakenly believed that it was lawful.

How is someone in the regulated sector in the UK to be certain that conduct of concern was legal under the law of a foreign country? The only way to be sure would be to seek a foreign legal opinion, which would be a huge additional burden in terms of cost and delay. Thus the change, whilst seemingly helpful, may serve to create additional uncertainty for MLROs. In practice, except in 'obvious' cases (such as that of the Spanish bullfighter), and subject to what is said below, reports may continue to be made about overseas conduct on a prudential basis. It is not clear whether a disclosure which is made unnecessarily (because the conduct in question was lawful overseas) could give rise to any civil liability; the wording of sections 337 and 338 of POCA would suggest that there would be no liability for breach of confidentiality.

2. Limited intelligence value reports

A report will only be required under sections 330-332 (the failure to report offences for employees in the regulated sector and MLROs) where the person making the report:

• can identify the person committing the money laundering offence; or

• can identify the whereabouts of any of the laundered property; or

• believes, or it is reasonable to expect him to believe, that the information which causes him to be suspicious will or may assist in identifying the person or the property.

This will be of significant assistance to auditors who, for example, will no longer need to report that their clients have suffered from shoplifting by persons unknown. Similarly, banks who have suffered fraud by persons unknown and have no useful information to report will not now need to do so.

Conversely, if any of the information set out at (a) to (c) is known, it must be included in the report; there can be no ‘editing’ to exclude such information.

There may be a degree of uncertainty in some cases as to whether a person “can” identify the launderer. Suppose, for example, an auditor is aware that his client has been defrauded and that the client knows who the perpetrator was. The police could ask his client who the criminal is – does that mean the auditor can identify the criminal? It is to be hoped that SOCA will not impose any additional obligations on those in the regulated sector, but in practice there may be some risk if employees close their eyes to information which is readily available.

3. Reporting procedures

SOCA inserts into section 339 of POCA a new offence (punishable by a fine) of making a report otherwise than on the prescribed form. This is subject to a ‘reasonable excuse’ defence. There is currently no prescribed form for the purposes of POCA (although NCIS prefer their standard reporting forms to be used), but this will be something for MLROs to monitor going forward.

SOCA also removes the provision, previously found in sections 330(9), 337(5) and 338(5) of POCA, that internal reports by employees must be made in accordance with the employer’s procedures. Most firms will have a standard form to be used by employees reporting to the MLRO, and guidance about how reports should be made. The effect of the change is that, if the form is not used/the guidance is not followed, but a matter is, in substance, reported to the MLRO, it cannot be disregarded. It will therefore be important for MLROs to ensure that matters raised outside normal procedures are treated as reports and do not ‘slip through the net’.

4. Threshold amounts

Section 103 of SOCA amends the main money laundering offences (sections 327-329 of POCA) such that no offence will be committed by a deposit-taking institution:

• in operating an account maintained with it;

• if the value of the criminal property is less than the “threshold amount”.

That amount is set at £250 (up from £100 in the original Bill), or a higher amount specified by a constable or a Revenue or Customs officer in giving or refusing consent to a transaction, or on request from the institution. Different amounts may be specified for different acts done operating the account.

Note that these provisions do not apply to the offences created by sub-sections 327(a), (b) or (e), namely concealing criminal property, disguising criminal property, or removing criminal property from England and Wales, Scotland or Northern Ireland. This allows a certain amount of ‘normal’ account traffic, but ensures that funds remain available for law enforcement to trace or seize in due course.

Institutions must also recognise that these changes do not exempt them from making a money laundering report (for which there remains no de minimis limit), but only from the requirement to seek consent to transactions below the threshold amount.

5. Legal professional privilege

Section 106 of SOCA amends the failure to report offence under section 330 of POCA so that a matter raised by an employee with his MLRO will not be treated as an internal report (so as to trigger the MLRO’s reporting requirements) if:

• the employee is a professional legal adviser; and

• the disclosure is made for the purpose of obtaining advice about making whether to make a report under section 330; and

• it is not intended to be a disclosure under section 330.

This provision attempts to address the difficulty created by the fact that protection is given to legally privileged information in section 330 (reports by employees to the MLRO) but not in sections 331 or 332 (reports by MLROs). The concern was that, once an internal report was made, the protection would be lost, and this would make employees reluctant to raise matters with their MLRO. The amendments do not satisfactorily address this problem. They envisage a rather cumbersome process of employees seeking advice prior to making a report, rather than simply extending the legal professional privilege defence to MLROs. More fundamentally, the position of other, non-legal, professionals, who are provided with copies of legally privileged advice, is not addressed.

The changes are, however, now largely superfluous. The Court of Appeal in Bowman v Fels (see our earlier e-bulletin) recently confirmed that the obligation to report money laundering (as a defence to the section 328 arrangements offence) did not override common law legal professional privilege. If that is correct, then neither would common law legal professional privilege be overridden by the reporting obligations in sections 330 to 332. The only troublesome cases might be where it is necessary to rely on the statutory protection, where it goes further than the common law.

Conclusion

The Serious Organised Crime and Police Act brings some welcome changes, but does not go far enough in addressing the many practical issues which POCA has created. It is to be hoped that time will be found in the new Parliament to continue to work towards a reporting regime that ensures all matters of significance are brought to the attention of law enforcement, whilst avoiding absurdities and over-burdening of reporting institutions. In the interim, it is likely that firms will need to amend their procedures and internal guidance when the SOCA changes are brought into force.

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

Herbert Smith LLP, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance.

© Herbert Smith LLP 2005