Partner John Binns explains the way money laundering laws work under the Proceeds of Crime Act 2002 (POCA).
A Problem for Us All
The laws on money laundering in Part 7 of the Proceeds of Crime Act 2002 (POCA) have a surprisingly broad application, creating risks for literally everyone in the country. But they seem increasingly to be a specialist subject.
Part of the problem is that significant aspects of those laws are designed for use by banks and others in the ‘regulated sector’. Those aspects are hard to understand by those outside that sector, although the effects on all of us are important.
What is ‘Criminal Property’?
A definition in two parts
Unhelpfully, it is not until the end of Part 7 (in section 340) of POCA that ‘criminal property’ is defined, although it is important from the start. There are two parts to the definition:
- the property constitutes or represents a person’s ‘benefit’ from ‘criminal conduct’ (in whole or in part, directly or indirectly); and
- the person doing the prohibited act (referred to by the unfriendly phrase ‘the alleged offender’) either ‘knows or suspects’ that this is so.
What is ‘criminal conduct’?
‘Criminal conduct’ is:
- conduct that breaks UK law; or
- conduct overseas that would break UK law if it happened here (this can be a nuisance for, among others, investors in overseas businesses that sell lawful cannabis products).
What is ‘benefit’?
‘Benefit’ is defined to mean obtaining property ‘as a result of’, or ‘in connection with’, the conduct (including a combination of criminal and other conduct).
It can include a ‘pecuniary advantage’ – broadly speaking, a saving made by committing crime (such as tax evasion).
The Principal Offences
Three sections back at the start of Part 7 (327 to 329) prohibit various acts in connection with criminal property (as defined above).
They are broadly arranged in descending order of seriousness, although the maximum sentence for all of them is the same (14 years’ imprisonment).
The first offence (section 327), which bears the somewhat casual title ‘concealing, etc’, includes concealing or disguising criminal property – what we might consider ‘classic’ money laundering.
But it also includes the much more commonplace acts of converting or transferring it (which include, for instance, sending funds from one bank account to another), and removing it from the jurisdiction.
The arrangements offence
The second offence (section 328) is slightly more mysterious. It is committed when a person ‘enters into or becomes concerned in an arrangement’, a deliberately broad term, and is sometimes called ‘the arrangements offence’.
To come within the section, the person must know or suspect that the arrangement facilitates the ‘acquisition, retention, use or control’ of criminal property by (or on behalf of) someone else.
Acquisition, use, and possession
The third offence (section 329) is the simplest to understand, and the easiest to commit. It includes acquiring or using criminal property, and even just possessing it.
So, in effect, a person who has criminal property in their possession can commit the offence without doing anything at all.
Defences (or exceptions)
Each of these offences is subject to various defences (or, more accurately, exceptions).
Unhelpfully, these defences engage parts of POCA that are packed with detail and jargon. They are designed for, and most often used by, banks and others in the regulated sector, but can be very hard for others to navigate.
The ‘Consent Regime’
Suspicious Activity Reports (SARs)
The main defence to the principal offences involves making what POCA calls an ‘authorised disclosure’, but which is better understood as the first of two kinds of Suspicious Activity Report (SAR).
SARs are commonly made to the Financial Intelligence Unit (FIU), part of the National Crime Agency (NCA), via an online portal.
Obtaining Consent, or a Defence Against Money Laundering (DAML)
The defence can be obtained by making a SAR and, if it is done before the act takes place, obtaining ‘consent’.
The NCA prefers to refer to this as a Defence Against Money Laundering (DAML), and SARs made for this purpose as ‘DAML SARs’.
The notice period and the moratorium period
Consent is obtained (under section 335 of POCA) where a request is made in a DAML SAR:
- that is not refused within seven full working days (not including weekends or bank holidays) after it is made (the ‘notice period’); or
- (if it is refused) after a further ‘moratorium period’ (usually 31 calendar days, though the Crown Court can grant up to six extensions, each up to the same length).
In practice, the NCA will often provide an explicit consent or refusal, perhaps after seeking clarification, by email.
The timing of a DAML SAR
The person making the SAR (the ‘alleged offender’) must make it (under section 338):
- before they do the prohibited act;
- while they are doing it (if they did not have knowledge or suspicion at the start, and made the SAR ‘as soon as practicable’ afterwards); or
- afterwards (if they had a reasonable excuse for not making it beforehand and make it ‘as soon as practicable’).
Protection from civil claims
DAML SARs are protected from civil claims for any damages that result from them, provided they are made in good faith (section 338(4A)).
This is bad news for bank account holders, whose lives or businesses can be seriously disrupted by a bank that erroneously flags a transaction as ‘suspicious’.
The perspective of the property owner
The idea of the consent regime is to avoid undue disruption to legitimate transactions due to suspicion from the regulated sector, but its effectiveness is debatable. In practice, problems arise from:
- the broad definitions of ‘benefit’ and ‘criminal conduct’, and the low threshold of ‘suspicion’;
- the length of the initial notice and moratorium periods (which, for many individuals and businesses affected, are considerable); and
- the many ways in which those periods can be extended, including moratorium extensions, and (more often) banks delaying, restricting, or declining to make consent requests.
Reasonable excuse etc
Other defences (which apply to all three principal offences under sections 327 to 329) include:
- intending to make a DAML SAR, but having a reasonable excuse not to;
- carrying out a function under POCA or another similar law; and
- (for banks only) handling funds in accounts below a specified ‘threshold amount’ (£250 is the standard, though it can be increased).
A defence for acts concerned with the proceeds of overseas conduct that is lawful where it occurs (though it would breach UK law if it occurred here) has been disapplied where the maximum sentence for the conduct in the UK would be 12 months or more.
For the third offence only (acquiring, using, or possessing), there is an extra defence where the property was acquired for ‘adequate consideration’ (essentially, something of equivalent value).
This does not apply, though, where the person knows or suspects that they may thereby help someone to commit ‘criminal conduct’.
Failure to disclose
There are also three offences of ‘failure to disclose’ under POCA (sections 330 to 332), which effectively require people to make a disclosure (the other kind of SAR) about a person who is or may be money laundering (which include principal offences under POCA, and equivalents overseas) from:
- people who have at least ‘reasonable grounds for suspecting’ such acts, due to their work in the ‘regulated sector’ (in which case a SAR can be made direct to the NCA, or internally, to their Money Laundering Reporting Officer (MLRO));
- MLROs within the regulated sector, where they have at least ‘reasonable grounds’ based on an internal SAR as above; and
- MLROs who know or suspect such acts, based on an internal SAR, but outside the regulated sector.
There are exceptions, including where the grounds or suspicions are based on information received in privileged circumstances (akin to legal professional privilege (LPP)).
All three ‘failure to disclose’ offences are punishable with up to five years’ imprisonment.
An offence of ‘tipping off’ (section 333A) prohibits, broadly speaking, people in the regulated sector letting suspects know about SARs or investigations about them. It is punishable with up to two years’ imprisonment.
This provision is why banks routinely refuse to discuss their suspicions with customers.
Prejudicing an investigation
A less onerous offence of ‘prejudicing an investigation’ applies outside the regulated sector (section 342).
What is the Regulated Sector?
The ‘regulated sector’ is defined in schedule 9 of POCA and includes (broadly speaking):
- various financial institutions (many of them defined by reference to somewhat obscure provisions of other EU and UK laws);
- auditors, insolvency practitioners, and accountants;
- tax advisers (and those who provide ‘material assistance’ on tax matters);
- lawyers and notaries, when participating in financial or real property transactions;
- providers of company and secretarial services;
- estate agents and some letting agents (where monthly rent is 10,000 euros or more);
- ‘high value dealers’ (engaged in cash transactions of 10,000 euros or more);
- casinos (other gambling providers have similar obligations, as conditions of their licences);
- some art market participants (where transactions involve 10,000 euros or more); and
- some crypto asset businesses (exchange providers and custodian wallet providers).
The Law in Practice
SARs: the signal and the noise
The idea of these provisions is to disrupt the proceeds of acquisitive crime by placing obligations on the ‘gatekeepers’ of the financial system, and to give law enforcement the opportunity to conduct investigations and prosecute at their discretion, while relevant assets are frozen.
In practice, the nature of those obligations (and protections) generates many more SARs than are of practical use, with a great many ‘false positives’ causing inconvenience and distress to those whose property is affected.
‘Classic’ money laundering: a rare beast
As for the money laundering offences themselves, meanwhile, very few cases in practice are prosecutions of people who have intentionally concealed or disguised the proceeds of serious crime.
Much more common are criminal investigations, and (increasingly) civil recovery, where the nature of the offending may be low-level or unclear, and the prohibited acts alleged involve no more than suspicion.
‘Handling criminal property’?
Perhaps the best way to think of money laundering under POCA is as a misnomer: the principal offences, after all, need not even involve either money or laundering.
That is far from a comforting thought, of course, for anyone who suspects they are handling, or involved in arrangements concerning, criminal property. This is the true nature of the offences concerned, which is a reason for us all to take care.