In the continuing international fight against terrorism and other criminal activity, there is a growing focus on the myriad ways in which the proceeds of such activity may be laundered by those involved thus sustaining the criminal activity. Those connected with the wider financial services arena are being tasked with playing their part in combating crime - and risk serious sanctions if they fail to do so.
Against this backdrop are examples of institutions failing in their responsibilities. The fine of £750,000 levied by the Financial Services Authority (the "FSA") last December on Royal Bank of Scotland for breaches of the money laundering regulations is a case in point. And yet it is now not just institutions, but also individuals working within them, who must be fully aware of what the law expects from them.
Within such a context, a reform of UK money laundering regulation, rules and guidance is high on the agenda of UK law makers. A central theme of such reform is to widen the scope of offences and to ensure that business and industry most susceptible to money laundering are within the scope of regulation. By way of example, as of 1 June 2002, bureaux de changes, money transmitters and third party cheque cashers have been required to be registered with H.M. Customs and Excise to ensure that they have anti money laundering procedures in place. Treasury also issued a consultation document in November 2002 which outlines proposals to replace the existing 1993 and 2001 Money Laundering Regulations. The proposed new regulations are to implement into national law The Second Money Laundering Directive (2001/97/EC) - this must happen by 15 June 2003.
This alert looks at the effect of one of the latest pieces of legislation and set of guidelines to be introduced in this ongoing fight against crime.
Purpose of the Proceeds of Crime Act 2002 (the "POCA")
"We want to ensure that those at the forefront of the sectors that are more vulnerable to money laundering report transactions that any reasonable person would regard as suspicious. The idea is to make life difficult for those who choose to use the UK's financial sector for laundering the gains from their criminal activities" - Lord Rooker, House of Lords Committee, 27 May 2002
The POCA received royal assent on 24 July 2002 with Part 7 of the POCA, dealing with money laundering offences and defences, coming into force on 30 December 2002. Part 7 of the POCA amends, consolidates and expands existing money laundering legislation and, in doing so, has a profound effect on the financial services, accounting and legal professions. (Various other sections of POCA were also brought into force on 24 February 2003.)
What will be of particular concern to those who are involved and whose clients are involved in the financial sectors is that, under Part 7, an individual who fails to report money laundering activity where he or she has reasonable grounds for suspecting that the money laundering is taking place will commit a criminal offence which could lead to a prison sentence of up to 5 years.
The New Money Laundering Offences
- Any individual operating in the "regulated sector" will commit an offence if they fail to report money laundering activity to their nominated officer, not only when they have actual knowledge or suspicion of such activity, but also now where there are reasonable grounds for suspecting the money laundering. So for the first time, an individual will commit an offence if they negligently fail to report money laundering. "Reasonable grounds" is wide enough to cover not only wilfully “turning a blind eye", but also negligently failing to implement the proper checks or make the proper enquiries or assessments.
- The scope of the offence of failing to report money laundering has been widened so that it will now be an offence to fail to report the laundering of the proceeds of any crime, and not just the proceeds of drugs or terrorism, as was previously the case.
- All reports of money laundering must now be passed onto the National Criminal Intelligence Service ("NCIS") in a new prescribed form, the detail of which is being finalised.
- An employee who fails to report money laundering will have a defence if they can show that their firm has not provided them with the recognised money laundering training, provided that the employee did not have reasonable grounds for suspecting the laundering.
- If a firm fails to provide adequate training to its employees, it will potentially breach the Money Laundering Regulations and the FSA's money laundering rules.
- A "nominated officer" or money laundering reporting officer will commit a separate offence if they receive an internal report of suspected money laundering, have suspicion or reasonable grounds for believing that the suspected money laundering is taking place and yet fail to make a report to NCIS as soon as practicable after receiving the internal report.
The Joint Money Laundering Steering Group Guidance
- The Court will take any guidance issued by the Joint Money Laundering Steering Group ("JMLSG") or the relevant professional regulator (for example, the FSA or the Law Society) into account in determining whether an offence has been committed under the POCA.
- Revised JMLSG guidance has been issued in draft and is expected to be approved this month. Once approved and issued, it will set out further guidance on staff training to enable staff to form a suspicion or recognise when they have reasonable grounds to suspect money laundering and will give examples of situations which may give rise to reasonable grounds for suspicion. Also, it will offer guidance in respect of the changes which, following implementation of the POCA, firms will have to make out to their internal and external reporting procedures, methods of reporting, training and record keeping. Supplementary guidance to cover the provisions of the POCA has been submitted to Treasury for approval and is currently available on the JMLSG website - go to www.jmlsg.org.uk for further information.
- Although technically non-binding, participants in the financial services industry will fail to heed such guidance at their peril.
As Part 7 of the POCA is now in force, all firms should consider very carefully whether their current money laundering controls, policies and procedures comply with the POCA generally, the proposed new JMLSG guidance and any guidance issued by their relevant regulatory body. In particular, firms should, as a minimum, re-address the following questions:
- Are your 'know your customer' checks thorough enough and are they being consistently implemented?
- Do you conduct regular reviews of your higher risk customers?
- Have all your relevant staff (and, most importantly, your money laundering reporting officer) been adequately trained to identify and report suspected money laundering?
- Have you and your relevant staff identified situations in which reasonable grounds for suspicion may arise?
Should you wish to discuss any of the issues raised by the POCA or the money laundering rules more generally, please contact either Jeremy Sharman or Brett Israel in the first instance.
* This practice alert is intended to provide a general outline and is not intended to be and is not a complete or definitive statement of the law on the subject matter. Further, professional advice should be sought before any action is taken in relation to the matters described in this practice alert.
 An FSA investigation had found that the Royal Bank of Scotland (the "Bank") had failed to obtain (or retain) sufficient "know your customer" documentation to adequately identify customers opening accounts across its retail network in early 2002. The fine was apparently substantially lower than it would otherwise have been because the Bank took immediate steps to remedy the deficiencies once senior management became aware of them.
 One notable recent example was the case of solicitor Jonathan Duff who was sentenced to 6 months imprisonment by the Manchester Crown Court for failing to report what he should have considered "suspicious" in relation to money paid to his firm by a commercial client who was subsequently convicted of drug trafficking (R v Jonathan Michael Duff  EWCA Crim 2117).
 A business is in the "regulated sector" to the extent that it engages in any of the following activities: (a) accepting deposits by a person with permission under Part 4 of the Financial Services and Markets Act 2000 (the "FSMA") to accept deposits (including, in the case of a building society, the raising of money from members of the society by the issue of shares); (b) the business of a National Savings Bank; (c) business carried on by a credit union; (d) any home-regulated activity carried on by a European institution in respect of which the established market conditions in paragraph 13 of Schedule 3 to the FSMA, or the service conditions in paragraph 14 of that Schedule, are satisfied; (e) 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; (f) the activity of operating a bureau de change, transmitting money (or any representation of monetary value) by any means of cashing cheques which are made payable to customers; (g) any activity which involves 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, or advising on investments; (h) any of the activities in points 1 to 12 or 14 of Annex 1 to the Banking Consolidation Directive, ignoring any activity described in any of sub-paragraphs (a) to (g) above; and (i) business which consists of effecting or carrying out contracts of long term insurance by a person who has received official authorisation pursuant to Article 6 or 27 of the First Life Directive.
 See s. 5(1)(c) of the Money Laundering Regulations 1993 and 2001 and Chapter 6 of the FSA Handbook Money Laundering Sourcebook.