Cleaning up on money laundering

John Rhodes, Macfarlanes

Brian Spiro, Simons Muirhead & Burton

Clare Montgomery QC, 3 Raymond Buildings

City lawyers who were caught napping over the latest developments in the battle against international tax evasion, could find themselves inadvertently heading for jail.

The UK's money laundering regulations - and the tough reporting duties they impose on professional advisers - are already widely known to cover the proceeds of drug trafficking, terrorism and fraud, as well as more hum-drum criminal activities.

Less well known, however, is that the regulations also cover the proceeds of tax evasion - traditionally thought to be a huge source of foreign cash for London's investor markets.

But the law, contained in the Criminal Justice Act 1993, which came into force in 1995, is untested by the courts and remains unclear to many. Confusion reigns as to how the law should be interpreted, or what the Government's policy on the issue is. Observers think a test case is now needed to clarify the law.

John Rhodes, partner in Macfarlanes' tax and financial planning department, warns of the dangers: "The people really in the firing line are investment houses and banks, while lawyers will be presented with the stark choice of either reporting clients, or maybe finding themselves guilty of a criminal offence."

He says: "While the Act's clauses on money laundering do not specifically refer to international tax evasion, it has recently become apparent that the Government interprets them as though they do. But even if they want the courts to adopt the same interpretation, UK case law endorses a view that the UK courts should not assist in collecting tax for other jurisdictions. The Government should set up a working party with lawyers and bankers to help clarify the position."

However, Brian Spiro, fraud partner at Simons Muirhead & Burton, is surprised that there is so much uncertainty: "A crime is a crime. And if money being laundered is the proceeds of a tax fraud, then why should that be treated any differently from any other criminal activity?" He says the argument that UK courts should not "collect tax" for other countries is "missing the point - it appears to ignore the distinction between civil and criminal liability. Once one accepts the basic principle that the courts have jurisdiction to investigate and impose sanctions on the laundering of proceeds of crime from outside the country, then it's hard to start to separate crimes by some arbitrary definition."

That tax evasion was not mentioned specifically in Parliamentary debate is "not a persuasive argument", Spiro says.

"Courts' judgments are littered with interpretations that were not in Parliament's mind." He adds: "If there is genuine confusion, then it needs clarification, either by more legislation, or a test case."

Clare Montgomery QC, a fraud and extradition expert at 3 Raymond Buildings, the chambers of Clive Nicholls QC, has given a legal opinion (instructed by Rhodes) on the matter. She concluded that tax evasion is indeed covered by money laundering regulations.

"I recognise that it will drive valuable business away, or underground, but that's the unwelcome lesson that the City will have to learn. The 1993 Act may have been a bolt from the blue for the banking sector, but others knew precisely what was happening."

The key lies with the Extradition Act 1989, and its definitions of serious criminal offences - a definition which is repeated in the Criminal Justice Act 1993. The 1989 Act may not mention tax evasion, but the associated extradition protocol does, she says.

So is there confusion? "I'm sure there is. Until recently, the financial services community had not focussed on the huge width of the definition of criminal conduct. They were lulled into a sense of false security."

She adds: "The pity is that there has not yet been a test case. The problem is, no City solicitor is likely to volunteer to be prosecuted."