In the open
19 April 2004
31 October 2013
M&A Weekly Update: fraud, bribery and money laundering sentencing guidelines; limited liability partners as workers; and more
2 June 2014
9 April 2014
3 July 2014
2 July 2014
By now, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 will be familiar to most lawyers. Much time has been dedicated to considering the impact of the legislation on legal advisers and on highlighting the various ways in which personal exposure could arise. However, despite the act potentially casting a very wide net, reaching far beyond legal advisers, little has been said about its implications for mediators, whether solicitors or otherwise. The truth of the matter is that many of the offences created by the act and the associated regulations apply as much to mediators as to legal advisers. Mediators are arguably even more at risk, as they cannot rely on defences open to legal advisers.
The act has introduced a number of money laundering offences carrying penalties of imprisonment and/or fines. There are offences that are of particular relevance to mediators. Under Section 328, it is an offence to become “concerned” in an “arrangement” that a person knows or suspects facilitates the acquisition, retention, use or control of “criminal property” – this covers all types of property directly or indirectly representing the proceeds of crime. This offence carries a maximum penalty of 14 years’ imprisonment and/or a fine.
Section 333 creates the offence of “tipping off”, whereby a person commits an offence if they know or suspect that a disclosure about suspected money laundering activity has been made to the authorities and they make a disclosure that is likely to prejudice an investigation that might be conducted. This offence is punishable by a maximum of five years in prison and/or a fine.
Under Section 342, it is an offence for a person, knowing or suspecting that an investigation is being or is about to be conducted, to make a disclosure that is likely to prejudice the investigation.
A number of issues arise. The most obvious question is how a mediator could be caught by Section 328, when at first sight the legislation would seem to apply to transactional business rather than dispute resolution. One way would be if a fictional ‘dispute’ was created in order to legitimise a transfer of funds under cover of a subsequent settlement agreement. Arguably, in assisting the parties to agree a settlement, a mediator would be “concerned” in an “arrangement” for these purposes. If so, at what point would the mediator be “concerned”? When the parties enter into a settlement agreement? When the negotiations start? Or even when the mediation is set up? It seems that the critical moment is when the mediator knows or suspects that criminal property is involved.
If the threshold for committing an offence is knowing or suspecting the requisite conduct, what constitutes knowledge or suspicion?
Presumably, allegations made by one party about another would not suffice, without more, but mediators will need to be alert to other information and circumstances that, taken cumulatively, may be sufficient to constitute suspicion. In reality, mediators will need to be alert from the moment they are instructed and will have to take a view in light of the context of each case.
Assuming that the mediator has the required knowledge or suspicion, in order to protect themselves they must report this to the appropriate authority or have a reasonable excuse for not doing so.
Furthermore, having made a disclosure, the mediator must wait until they have received consent to proceed with the mediation. If the mediator proceeds without consent, they will be committing an offence, notwithstanding the disclosure. There are several difficulties here. First, if, as is likely, the relevant information does not come to light until shortly before or even during the mediation, the mediator will need to adjourn the mediation in order to obtain the required consent. However, in adjourning the mediation, the mediator must take care not to “tip off” the suspected party, thus falling foul of Section 333 or Section 342. In order to deal with this, mediators should, in their standard terms and conditions, reserve the right to adjourn the mediation at any time, without having to give any reasons. However, it is difficult to see how this would work in practice. In any event, mediators will need to act with extreme sensitivity.
It goes against the grain for a mediator to disclose confidential information gleaned in preparation for, or in the course of, a mediation. However, mediators are absolved of any breach of confidentiality if they have made a disclosure of information in the circumstances envisaged by Section 337 of the act – essentially that the information came to them in their capacity as a mediator and was disclosed to the authorities as soon as practicable. Mediators should consider amending their standard terms and conditions to make clear that they may be legally obliged to breach confidentiality.
One protection that is available to legal advisers but is denied to mediators is that of legal professional privilege. A legal adviser may escape liability for a “tipping off” or “prejudicing an investigation” offence if they made the relevant disclosure in connection with giving legal advice.
The offences discussed above apply to any individuals. However, the legislation imposes further burdens on those acting in the regulated sector. The Money Laundering Regulations 2003 defines the regulated sector as “the provision by way of business or legal services… which involves participation in a financial or real property transaction… assisting in the planning or execution of any such transaction or otherwise acting for or on behalf of a client in any such transaction.” While it is clear that solicitors, acting as legal advisers, are acting in the regulated sector, the status of mediators is not so clear-cut. The crucial question is whether the facilitation of settlement constitutes “assisting in the planning or execution of [a financial or real property transaction]”. Given the risks and penalties involved, most mediators will proceed with caution and assume that they do operate in the regulated sector.
Regulation 3(2) of the regulations imposes a duty on those in the regulated sector to set up a system for reporting knowledge or suspicions about possible money laundering to a nominated officer and to establish procedures for verifying the identity of clients.
Failure to comply could mean two years in prison or a fine, regardless of whether there is any money laundering. Mediators in the regulated sector must therefore verify the identity of their clients. This begs the question of who the client is. While it would be easier if the mediator could treat the ADR service provider through which he is being instructed as the client, the more realistic view is that the mediator’s clients are the parties to the mediation. The mediator can probably rely on investigations by the parties’ solicitors, if they have satisfied themselves that the steps taken by the solicitors match their own procedures. This will often be difficult to verify, so mediators will often have to carry out their own verification.
Under Section 330 of the act, those in the regulated sector have a duty to report to their nominated officer any knowledge or suspicion, or reasonable grounds for knowledge or suspicion, of money laundering. The penalty for failing to do so is a maximum of five years in prison and/or a fine. Note that, as with Sections 333 and 342, while legal advisers may rely on legal professional privilege to escape liability, mediators do not have the same get-out clause.
The above highlights some of the risks facing mediators under the money laundering legislation. As the legislation is still in its infancy, it remains to be seen how much of an impact it will have on the conduct of mediations. What is certain is that mediators need to be vigilant and there needs to be a sharing of views in respect of the circumstances of particular cases. Mediators beware.
Patrick Sherrington is the head of Lovells’ dispute resolution practice. He was assisted on this article by professional support lawyer Saira Singh