Organised crime is one of the greatest threats to the national security of the UK, and indeed every country. In the UK, it is the task of the National Crime Agency (NCA) to disrupt and bring to justice those serious and organised criminals who present the highest risk to the UK, and one of its primary weapons is the law.

As is well-known, international and national criminal activity and terrorism rely a great deal on the ability to launder criminal money into usable “clean” funds, both to allow the proceeds of crime to be used in the open economy and to finance terrorist activity in the UK and overseas. To combat this, the UK and other countries have developed a sophisticated anti-money laundering and counter terrorist financing framework consisting of primary and secondary legislation in accordance with Financial Action Task Force (FATF) international standards and European Union Directives. The legislation involves and affects “regulated industries” that deal with third party money, which includes not only financial institutions such as banks but also lawyers and accountants. In the UK the primary legislation consists of the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TACT). The secondary legislation is the Money Laundering Regulations (MLRs). POCA consolidated, updated and reformed previous UK legislation relating to money laundering and criminal property. POCA criminalises all forms of money laundering, and also creates offences concerning failure to report suspicion of money laundering. The legislation covers all criminal property, where the alleged offender knows or suspects the property constitutes or represents a benefit from any criminal conduct. Property is all property situated anywhere in the world (ie not only money but also all forms of property including personal, heritable, intangible and incorporeal property, and property obtained by a person who has an interest in it).

Money laundering offences under POCA

The effects of POCA is to criminalise three principal money laundering offences. These offences are punishable by a maximum of 14 years imprisonment and/or a fine.

Section 327; if a person conceals, disguises, converts, transfers or removes from the jurisdiction property which is, or represents, the proceeds of crime which the person knows or suspects represents the proceeds of crime.

Section 328; when a person enters into or becomes concerned in an arrangement which he knows or suspects will facilitate another person to acquire, retain, use or control criminal property and the person knows or suspects that the property is criminal property.

Section 329; when a person acquires, uses or has possession of property which he knows or suspects represents the proceeds of crime.

In addition, Sections 330 and 331 obliges individuals operating in regulated sectors to report their suspicion or knowledge of money laundering activities to the NCA. Failure to report is a criminal offence. Regulated organisations are also obliged to appoint a “nominated officer” to report suspicions or knowledge to the NCA. The NCA deals with many thousands of such reports every year.

Reporting obligations under POCA The reporting obligations in POCA are applicable to anyone in the UK who is involved with an individual or business which may commit a money laundering offence. Individuals working in regulated sectors also commit an offence if they do not submit a SAR (“Suspicious Activity Report”) to the NCA if they know or suspect, or have reasonable grounds to know or suspect, that another individual or person is engaged in money laundering, and the information came to them in the course of their business in the regulated sector. It is also an offence for an individual working in the regulated sector not to report to their ‘Nominated Officer’ or the NCA if the conditions for reporting have been met. POCA also makes it an offence for a nominated officer not to disclose to the NCA if the conditions for reporting have been met.

POCA allows reporters a defence against what would potentially be a money laundering offence by seeking the consent of the NCA to undertake an activity which the reporter believes may constitute one of the three money laundering offences-for example, a bank receiving funds from a source which it believes to be suspicious would be committing an offence under section 327. However, if it submits an SAR giving details of its Customer, the funds involved and the reasons for its suspicion then it can rely on the defence. The SAR process also allows a reporter to request permission to deal with the funds, for instance to advance a mortgage to its Customer. The NCA has 7 working days to make a decision, after which time consent is deemed to have been given (although this can be extended to 31 calendar days if the NCA notifies the reporter within the first 7 days).

The “tipping off provisions” (Section 333A-E) make it an offence, having submitted a Suspicious Activity Report (SAR), for a reporter to reveal information which is likely to prejudice any resulting law enforcement investigation.

What amounts to “suspicion”?

The SAR regime is engaged by reasonable grounds for suspicion or simply just suspicion. All that is necessary for suspicion to arise is for the person to recognise that there is “a possibility, which is more than fanciful, that the relevant facts exist.” However it is also clear that “a vague feeling of unease would not suffice.”

The Joint Money Laundering Steering Group is made up of leading UK Trade Associations in the Financial Services Industry. The current JMLSG guidance says that “Suspicion is more subjective and falls short of proof based on firm evidence. Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation, for example:  “A degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or not”; and  “Although the creation of suspicion requires a lesser factual basis than the creation of a belief, it must nonetheless be built upon some foundation.”“ This benchmark is known as “the Da Silva test”. The JMLSG also points out that  “A transaction which appears unusual is not necessarily suspicious. Even customers with a stable and predictable transactions profile will have periodic transactions that are unusual for them. Many customers will, for perfectly good reasons, have an erratic pattern of transactions or account activity. So the unusual is, in the first instance, only a basis for further enquiry, which may in turn require judgement as to whether it is suspicious. A transaction or activity may not be suspicious at the time, but if suspicions are raised later, an obligation to report then arises.” “A member of staff, including the nominated officer, who considers a transaction or activity to be suspicious, would not necessarily be expected either to know or to establish the exact nature of any underlying criminal offence, or that the particular funds or property were definitely those arising from a crime or terrorist financing.”

All of this creates a minefield for those working in regulated sectors. How it works in practice can be seen in the case of Shah ˗v˗ HSBC Private Bank, a case decided in 2012. In Shah the Queen’s Bench Division dismissed Mr Shah’s claims for damages against HSBC for over US$300m. Mr Shah’s claim for breach of contract was on the basis that he had suffered loss because of the bank’s failure to carry out his payment instructions promptly and their refusal to explain the basis for their failing to do so. In September 2006, HSBC made a suspicious activity report (SAR) about Mr Shah when he attempted to send over US$28m to an account of his in Switzerland. A further four SARs were made over the next five months, with transactions being delayed while HSBC awaited consent to proceed from NCA (then known as the Serious Organised Crime Agency or SOCA). HSBC told Mr Shah that it was complying with its statutory obligations but did not provide any further information to Mr Shah or his solicitors. During this time, a former employee alerted the Zimbabwean authorities to the fact that Mr Shah’s UK accounts had been frozen. The Zimbabwean authorities subsequently froze and then seized Mr Shah’s investments in Zimbabwe, resulting in alleged losses of over US$300m.In dismissing Mr Shah’s claims for damages against the bank, the court:

•confirmed the test for suspicion set out in the case of R v Da Silva [2007] 1 WLR 303;

•found after hearing evidence from the person who made the report that a claim of bad faith could not be sustained as the suspicion was honestly and genuinely held, in this case;

•found that the loss was caused primarily because of actions by the Zimbabwean authorities which HSBC could not have foreseen;

•found that Mr Shah had failed to mitigate his own losses by not using other sources of funds to pay the former employee;

•agreed to imply two terms into the bank’s contract with Mr Shah to the effect that they could refuse to execute instructions in the absence of appropriate consent where it suspected that a transaction constituted money laundering, and that the bank would not provide information to the client if there was a risk of tipping off; and

•held that if a bank wants to rely on liability limitation clauses in its terms and conditions, it will need to show that those terms are reasonable in all the circumstances.

In practice, what this means is that if a bank suspects you of money laundering, it could freeze your account until it has complied with its obligations under POCA and the MLR’s, and would be unable to tell you anything about why it has done so either during the freezing period or after it, and it would be very difficult to bring a claim against the bank even if you suffered financial loss as a result (for example if you were unable to complete on a purchase and the purchaser forfeited the deposit).

For more information contact David Vaughan-Birch.

Money Laundering; what it is and why it’s important to businesses everywhere