HM Revenue and Customs recently published a list for the tax year just ended of companies that have not complied with the 2017 money laundering regulations. It made the headlines mainly because the list included the estate agents Countrywide.
With law enforcement agencies taking a tougher stance on money laundering, companies and individuals have to be aware of both the risks and the law regarding it if they want to avoid Countrywide’s plight. It will not be an area of law that general counsel in many companies will be especially familiar with. But there may be an occasion in the future when they need to know what money laundering is and how to respond to allegations.
If allegations are made, the best course of action is to seek expert, specialist legal representation. This article is a brief refresher guide to money laundering, the problems it can cause those in business and how the potential for problems can be minimised.
The Definition of Money Laundering
Money laundering is the ‘cleaning’ - the disguising of the origins - of the proceeds of crime. While money laundering schemes may vary, they are all attempts to hide the fact that wealth was acquired through crime.
It can involve a person laundering the proceeds of their own offending or someone else’s offending. Money laundering will usually involve putting money that was gained through crime into the financial system, using it in a series of complex transactions and then absorbing it into the legal economy by buying assets such as property. Prosecutions for money laundering can involve any or all of these stages.
In the UK, money laundering offences are the subject of sections 327 – 329 of the Proceeds of Crime Act 2002 (POCA).
The three money laundering offences created by POCA each carry up to 14 years imprisonment:
Section 327. This offence can be committed if a person conceals, disguises, converts, transfers or removes criminal property from the jurisdiction. This offence is usually the one the Crown will use to prosecute someone they believe has laundered their own proceeds of crime.
Section 328. This offence is committed when a person becomes involved in an arrangement to help someone else keep, obtain, use or control criminal property. For this offence, the person becoming involved must know or suspect that the property is criminal property.
Section 329. This offence is committed when a person acquires, uses or has possession of criminal property. For example, someone who buys a car or a house from a criminal.
There are exceptions to all three charges - where the organisation concerned makes an “authorised disclosure” to the relevant authorities. This is to protect banks and other businesses from committing what would otherwise be an offence when dealing with a criminal’s money. The Act is clear that certain such organisations are under a duty to inform the police of any customer they believe is laundering criminal cash through their business.
What should always be remembered is that money laundering can be committed unwittingly. For example, a company’s office in a foreign country may have secured contracts using bribery. That bribery may not be known to those in the company’s UK headquarters. Yet if any proceeds from such contracts are then transferred to the company’s UK accounts this is, in effect, a case of the company moving the proceeds of crime – which is potentially money laundering. Such a scenario raises the issue of the legal requirements to report money laundering. A failure to report it can have serious repercussions.
Obligations to Report Money Laundering
POCA places a responsibility to report money laundering on anyone in the UK that may have any dealing with an individual or business. It can be reported to the National Crime Agency (NCA), HM Revenue and Customs (HMRC) or the police.
Extra responsibilities are placed on those who work in what is defined by POCA as the ‘regulated sector’: firms that are part of the financial services community and are regulated by the Financial Conduct Authority (FCA) or various other professional bodies. Such organisations include banks, insurance companies, lawyers, and accountants.
Those in the regulated sector are thought to be more likely to encounter money laundering because of the large amounts of money that are moved through them. Persons in the regulated sector are required, under Part 7 of POCA and the Terrorism Act 2000 (TACT), to submit a suspicious activity report (SAR) if they know, suspect or have reasonable grounds for knowing or suspecting that a person is engaged in, or attempting, money laundering or terrorist financing. A SAR must be submitted as soon as is practicable. Last year saw a record 463,938 SARs submitted – a 10% increase on 2017.
The Importance of an Internal Investigation
A company may become aware of money laundering as a result of suspicions about the transactions being conducted or proposed by a client or trading partner. But it can be discovered in a number of other ways. It may be noticed in routine checks or audits or as part of an investigation into another aspect of a company’s working practices. It could be raised as a concern by a whistleblower who is either an employee or has dealings with the company as a customer, client or trading partner. Money laundering could even be recognised during the due diligence process, when one company is looking to buy or merge with another. Information shared between those working in the regulated sector may also lead to a company being notified of the possibility of laundering.
When money laundering becomes apparent or there is even the slightest possibility that it has been committed, it is advisable that a company conducts an internal investigation. This is essential in order to determine what exactly has happened, how it happened, what evidence is available and the best course of action. The findings of an internal investigation can enable a company to self-report the money laundering it has identified. This may mean more lenient treatment from the authorities than if the authorities found out about the laundering for themselves.
A carefully planned and conducted internal investigation will also ensure the company is better prepared when a law enforcement agency begins its investigations. It is often the case that it is best for an internal investigation to be conducted by external experts experienced in dealing with the relevant law enforcement agencies, who can determine the best course of action to follow.
Money Laundering Prevention
While companies or individuals may seek specialist advice if they become the subject of a money laundering investigation, such expertise can also be sought in order to prevent the offence being committed. The potential for wrongdoing being committed by staff can be assessed and then acted upon. New procedures can be introduced or existing ones changed to make it as difficult as possible for money laundering to be carried out by employees, clients, customers, trading partners or associates of a company.
While many in business have to react to money laundering allegations as they arise, there is value in being proactive and looking at how money laundering risks can be designed out. Changes to the way individuals and departments work – both independently and with colleagues and third parties – can make it harder for illegal acts to be committed. The fact that a serious, concerted effort was made to prevent money laundering can form a strong part of any defence to allegations that may be made in the future.
Money laundering prevention will also be aided by efforts to promote an anti-crime culture in the workplace. A well thought-out whistle blowing procedure that is regularly reviewed for effectiveness and publicised in the workplace will be of value in encouraging staff to report their suspicions of wrongdoing in the knowledge that their concerns will be treated seriously and investigated properly.
A workplace culture that sees staff questioning the origins of money passing through a company, its rightful owner, how it was acquired and the precise details of any deal it is set to be used in can go a long way to reducing the potential for laundering. This can involve staff training, which will cost. But the costs may be significantly less than those caused by a money laundering investigation and prosecution.
Money laundering is unlikely to affect each and every business. But each and every business does need to be aware of how to reduce their vulnerability to it.
Money laundering is subject to ever more official scrutiny. As an example, the European Union’s Fourth Anti-Money Laundering Directive (4 MLD) came into force on 26th June 2017. It places greater obligations on banks and other financial institutions to carry out greater levels of customer due diligence. The Directive also requires corporate and legal entities, trusts and other similar structures to maintain adequate, accurate and current information on their beneficial ownership. And it compels each EU state to carry out a national risk assessment every two years of its exposure to money laundering and terrorist financing. The EU’s Fifth and Sixth Anti-Money Laundering Directives are also scheduled.
In the UK, the Criminal Finances Act 2017 has introduced unexplained wealth orders (UWOs) and asset freezing orders. UWOs require an individual or a company to explain how they came to possess an asset – or risk losing it - while asset freezing orders allow the authorities to freeze accounts while they investigate the source of the funds in them.
Like 4 MLD, they are an indicator of the authorities’ desire to tackle money laundering – and of the need for those in business to be aware of the risks.