8 March 2004
24 February 2004
13 April 2004
1 March 2004
14 October 2003
24 April 2000
The Money Laundering Regulations 2003 came into force on 1 March. These regulations add to the money laundering provisions under the Proceeds of Crime Act 2002 (PoCA), which have been in force for almost a year. Among its many draconian provisions, the act imports the criminalisation of professional negligence directly into the solicitor’s office. Many remain unaware of the extent of the change in the law and remain confused as to their responsibilities to the authorities and to their clients.
In light of these changes, the Law Society has revised its guidance to solicitors and Law Society president Peter Williamson says that solicitors who follow the guidance will maximise their ability to comply with their obligations under the legislation. Whether this will be sufficient protection is still unclear – forewarned, however, is forearmed.
The profession of solicitor is not included within the regulated sector. Rather, it is the nature of the activities that a firm undertakes that will determine this. Such a redefinition of practice areas would not be of the foremost concern, apart from the fact that practice within the regulated sector may expose a solicitor to the risk of new criminal sanctions. In addition to the substantive money laundering offences, PoCA creates an offence under Section 330 of failing to disclose. If a solicitor is in the regulated sector, they commit an offence if they fail to make “the required disclosure” when, in the course of business, they acquire knowledge, suspicion or reasonable grounds for knowledge or suspicion, that another person is engaged in money laundering.
The test of reasonable grounds for knowledge or suspicion imports a test of negligence to criminal liability. No transaction need have been contemplated or even have taken place; all that is required is that a solicitor, on an objective test such as in the view of a jury, failed to report to the National Criminal Intelligence Service (NCIS) that which ought to have appeared suspicious.
Formal recognition of legal professional privilege (LPP) is preserved within PoCA. If the information came to the solicitor in circumstances of LPP, they commit no offence under Section 330 by failing to report; if it did not, then they commit an offence by such failure. Of course, any communications taking place with the intention – it matters not whose intention – of furthering a criminal purpose cannot be privileged.
The provisions establishing the defence of LPP only refer to “professional legal advisers”. Accountants and other experts are frequently retained in litigation, receiving and creating privileged material protected from disclosure by litigation privilege. They would not normally be referred to as professional legal advisers. Such a restrictive definition might mean that solicitors could not pass privileged information to their staff or experts in case they, in turn, felt they should disclose it to NCIS. This anomaly has been brought to the attention of the Government by the Law Society.
If the solicitor knows that their client is engaged in money laundering, and the solicitor risks committing a substantive money laundering offence by continuing to act, the communications relating to the transaction are not privileged and can be disclosed. However, in practice the question is often more fraught.
Suppose that, as a result of information received, the solicitor merely suspects that their client is engaged in money laundering. If the suspicions are correct, the communications with the client are not privileged; however, if the suspicions are unfounded, the communications remain privileged. In normal circumstances the obligation of confidentiality and the protection of privilege would prevent a solicitor from reporting any communication that causes the solicitor to suspect the client has criminal property. While a solicitor is weighing these niceties with his or her increasingly anxious money laundering reporting officer, the NCIS clock is ticking and failure to report as soon as is practicable is also an offence. It is to be hoped that the courts will interpret the phrase “as soon as practicable” to allow time for legal advice to be taken.
For the lawyer who has decided that they must report their suspicions to the NCIS, there being no protection in LPP for not doing so, the next vexed question is whether they can tell their client. Can they do so without ‘tipping off’ the client and committing a separate offence? The answer – indeed the stock answer for all PoCA problems – is, it depends.
As yet, the only decided authority on the point is the judgment of Dame Elizabeth Butler-Sloss, president of the Family Division, in P v P (8 October 2003). This case concerned ancillary relief proceedings in which a party’s legal adviser had reported the other side to the NCIS for apparent tax evasion. The president recognised that in family proceedings there is an enhanced duty upon lawyers for full and frank disclosure. She concluded that these enhanced duties appeared to attract protection under Sections 333(3) and 343(4), which permit a legal adviser to communicate such information to their client or opponent “as is necessary and appropriate in connection with the giving of legal advice or acting in connection with actual or contemplated legal proceedings”.
There will inevitably be cases where the mere communication to a client that a report is contemplated will prejudice an investigation, so should the solicitor attempt to persuade the client to join in a joint report on the client’s own affairs? And if the client refuses, as would seem more than possible, should the solicitor then withdraw? The Law Society has unequivocally said yes.
How, then, are lawyers to act? How will clients react? Managing existing and future relationships will in some cases be
very difficult and in others impossible.
Business will be lost to perfectly legitimate competing firms and, for those in the criminal law, anxieties regarding existing clients – often difficult and sometimes dangerous people – will be exacerbated.
So, what to do? First, determine whether you are in the regulated sector. Solicitors acting on the sale or purchase of property clearly fall within the scope of the regulations. However, what amounts to “participation in a financial transaction”, as described by the regulations, is less clear. Firms that are uncertain whether they are required to comply with the regulations should take specialist legal advice.
Redraft your client care letter. It would not constitute tipping off for a firm to include a paragraph about obligations under the money laundering legislation in its standard client care letter. Then establish ‘best practice’, tailored to the work that you handle. The 2003 regulations require all persons carrying on relevant business to “establish such procedures of internal control and communication as may be appropriate for the purpose of forestalling and preventing money laundering”. Even though the conduct of relevant business may not apply to a particular firm as a whole, there is good sense in establishing a culture of compliance with the regulations across the board. Do not forget, failure to comply with the new regulations may constitute an offence punishable by up to two years’ imprisonment, irrespective of whether money laundering has actually taken place.
Peter Caldwell, a barrister, is a member of 2 Dyers Buildings’ money laundering team
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