Litigation Special Report: Caught cold

Legislation enacted in the wake of 9/11 is now being used to police the financial services sector, and the UK’s recent Landsbanki Freezing Order has led some
to fear they may have unwittingly broken the law.

Litigation Special Report: Caught cold When the planes flew into the twin towers on the morning of 11 September 2001, few would have predicted the sweeping and draconian legislation affecting both companies and individuals that would follow in their wake.

Here in the UK the Anti-terrorism, Crime and Security Act 2001 (ATCSA) was rushed through Parliament, coming into force on 14 February 2002. The Proceeds of Crime Act 2002 (Poca) followed shortly after, with most of the provisions coming into force just over a year later on 24 February 2003, providing extensive powers in criminal and civil courts to freeze and confiscate or recover funds assumed to be the proceeds of crime.

Even then, only the most prescient could have predicted that, seven years on, powers in the ATCSA could or would be used to enact the Landsbanki Freezing Order. This was enacted on 8 October 2008 (amended on 20 October 2008), because the Treasury believed that “action to the detriment of the United Kingdom’s economy (or part of it) has been or is likely to be taken by certain persons who are the government of or resident of a country or territory outside the United Kingdom”.

It gave effect to a freeze on funds owned, held or controlled by Landsbanki, or funds relating to Landsbanki that were own­ed, held or controlled by certain Icelandic authorities or the government of Iceland. Landsbanki is also a specified person.

The order was brought into force without notice to the financial community or the public at large, creating a large number of new and wide-ranging criminal offences, with ­penalties of up to two years’ imprisonment. This led to the Treasury being bombarded with queries concerning the order’s ambit and resulted in it granting licences disapplying certain prohibitions to permit the exercise of various rights on termination of agreements with Landsbanki and to allow the London branch of Landsbanki to continue to service its business customers.

Offences and defences

Article 4 of the order lists a number of ­prohibitions in relation to frozen funds and Articles 5(1) and 5(2) set out offences in ­relation to those prohibitions.

Article 5(3) lists specific defences to the offences in Articles 5(1) and 5(2), based on a person having no knowledge or “reason to suppose” that the person for whose benefit frozen funds are made available was a specified person or that the person who owned, held or ­controlled the frozen funds was a specified person.

How will this be interpreted? Poca, the governing statute on money laundering, sometimes uses the word “suspects” and, at other times, the phrase “reasonable grounds for suspecting”. In the latter, clearly, the word ‘reasonable’ qualifies the statutory wording. The defence in Article 5(3) of the order, ­however, is not clear. It is not ­explicit that the reason to suppose must be ‘­reasonable’. A person may have no reason to suppose that they are dealing with frozen funds because there is nothing that alerts them to that fact, even though had proper systems been in place they would have been so ­alerted.

The word ‘reason’ can simply amount to a declaration to explain or justify actions or decisions; it can also refer to an underlying fact or cause that provides logical sense for a premise or occurrence. The latter ­interpretation may suggest that further exploration is required before someone can avail themselves of the defence. It seems likely that a court would wish to import an ­element of objectivity to enable it to find that a person, acting reasonably, should have proper systems in place to detect trans­actions in breach of the order.

Another interesting question is that of whether there is a defence if a person knows that they are dealing with a specified person but has “no reason to suppose” that the funds themselves are frozen funds (in other words that they are owned, held or controlled by Landsbanki or that they relate to Landsbanki). There is no provision for a defence to this in the order, but given that the “no reason to suppose” defence applies to specified persons, it would seem logical that this should extend to the funds themselves.

Other offences in the act include secondary liability by virtue of Article 11, the offence of providing false information with a view to obtaining a licence by virtue of Article 7(5) and (6), and the reporting provisions in the order make it an offence not to provide information or documentation (or ­knowingly or recklessly to provide false information or documentation) that the Treasury requests for ascertaining whether an offence has been committed.

There are other specific reporting requirements for regulated persons that do not require a prior request from the Treasury. Paragraph 7 of the schedule provides that information that a person has been compelled to disclose may be provided in a range of circumstances, including “with a view to instituting […] any proceedings in the United Kingdom for an offence under this Order”.

It remains to be seen whether these issues concerning the scope and meaning of the offences and defences under the order are litigated in the criminal courts. Given that the consent of the Treasury or the Director of Public Prosecutions is required before proceedings for an offence under the order are instituted, it seems likely that only in cases of flagrant and deliberate breach of the order will proceedings follow.

Judith Seddon is a senior associate at ­Clifford Chance

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