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The new statutory provisions relating to money laundering contained in Part VII of the Proceeds of Crime Act 2002, which came into force on 24 February this year, and the Money Laundering Regulations 2003, which will implement the Second European Union Money Laundering Directive and which must come into force by 15 June 2003, are of particular relevance in the context of private client work.
To understand the impact of the new law on private client practitioners, you need to understand the money laundering process. Money launderers are seeking to convert the proceeds of crime into assets that appear to have a legitimate origin through what is often described as placement, layering and integration.
Placement is the stage at which funds are introduced into the financial system, for example, by depositing money in a bank account. Many jurisdictions impose an obligation on banks and financial institutions to report transactions above a certain level, but laundering does not just involve large sums of cash. Large sums can be broken down into small amounts and banked it in a variety of accounts before being marshalled again later.
Layering involves the conversion and movement of funds to put distance between their origin and their source, and would include wiring funds between accounts or using shell companies or trusts. This means that the private client lawyer is at risk of being sucked into the layering process. Another means of layering is to transfer funds purportedly as payment for goods or services. A request to pay money into client accounts and then pay it back might reasonably be considered suspicious, but exactly the same result is achieved where money is deposited with a lawyer in relation to a proposed transaction and, when the transaction becomes abortive, is returned to the client.
The final stage in the process, known as integration, is the means by which laundered funds re-enter the legitimate economy, for example through buying property, luxury assets or business ventures.
Private client practitioners need to think about each of these stages when considering what their clients are asking them to do.
Part VII of the Proceeds of Crime Act makes it an offence to conceal, disguise, convert or transfer, acquire, use or possess criminal property, or to make arrangements in relation to it. But what is 'a crime'? The act extends the scope of the anti-money laundering legislation to cover the proceeds of any crime. An act will be regarded as criminal if it is indictable in the UK, even if it is not criminal in the country in which it was carried out. Money that has not been properly declared for tax purposes to a foreign revenue authority, or the proceeds of businesses that may be entirely legal where they are carried out, for example licensed prostitution, will be 'the proceeds of crime' for the purposes of the act.
Private client lawyers are going to have to be particularly careful to ensure that they do not inadvertently deal with such proceeds of crime, because if they know or suspect them to be so, those proceeds will become criminal property and having dealings with them will be committing one of the new offences. The maximum penalty for doing so is an unlimited fine or 14 years in prison. There is a defence if you obtain consent from the authorities in advance, but to do so you need to make a disclosure, and if you want to avoid the professional embarrassment of putting a transaction at risk you need to disclose as soon as you have concerns. Bear in mind that if you do anything that puts the potential money launderer on notice that you have made, or are going to make, a report, you are guilty of the offence of tipping off, the maximum penalty for which is five years in prison or an unlimited fine. Practitioners, therefore, have to be extremely careful in handling a client once a decision to make a report has been taken.
Any person involved in regulated business who becomes aware of the proceeds of crime has an obligation to make a report, either to the authorities or to the firm's nominated money laundering officer, even if that person is not involved with the proceeds of crime themself. The maximum penalty for failing to report is an unlimited fine or five years in prison.
When the 2003 regulations come into force, the definition of 'regulated business' will be widened to include much, if not all, of what private client practitioners do. From June, therefore, merely avoiding getting involved with something you consider may be an attempt at money laundering will not be enough. If you have a suspicion, you will have to make a report, even if you have declined to act. Tougher still, the report imposes an objective test for the suspicion that a practitioner is taken to have had. Broadly, if a reasonable person doing the practitioner's job, and knowing what they knew, would have been suspicious, the practitioner is deemed to have been suspicious too, whether or not they actually were.
For many years it has been mandatory to identify clients in relation to 'regulated business'. But from June, when the meaning of that term changes, the obligation to identify the client will be extended to almost all activities carried out by private client practitioners. This may raise a lot of questions. You will need to establish that someone of a particular name exists and lives at a particular place, by viewing a utility bill for example, and that the client is that person, perhaps by examining photographic evidence, such as a passport or photocard driving licence.
When acting in relation to a trust or similar structure, who needs to be identified? Is it sufficient to verify the identity of the trustees? And what about the settlor from whom the funds originated, or some or all of the beneficiaries who will enjoy the benefit of the settled funds? There are also practical issues in relation to longstanding existing clients. Should you ask to verify their identity when you are next asked to prepare a new will? The safe answer is yes, as they have then been identified for the future.
The client identification requirements can be particularly difficult to meet when advising elderly clients, especially those who are in nursing homes. These are clients who may no longer have passports, driving licences or utility bills. A pragmatic approach is needed in such situations and alternative identification checks must be considered.
Regulators may view private client practitioners with suspicion because they use trusts and other complex structures that can be used for layering funds. In addition, they often make use of offshore financial centres, which some also see as suspicious. Finally, they represent wealthy and sometimes high-profile individuals. They will almost certainly be under increased scrutiny and will have to be particularly careful to ensure that they do not inadvertently become involved in money laundering transactions, or fail to report a suspicion where they should have done. They will also have to remember that the substantial fine that was recently imposed on the Royal Bank of Scotland was not imposed for being involved in money laundering activities, but for failing to be able to demonstrate the existence of adequate client identification procedures.
The bottom line is that all firms engaged in private client work need to be aware of the new provisions and how to ensure compliance with them.
Robert Brodrick is a solicitor and Clive Cutbill a principal in the private client department at Withers