In the latest of our legal guide series, BCL partner, John Binns explains the complex nature of money laundering investigations.
Money Laundering Cases: How Do They Start?
The ‘predicate offence’
The discovery of a suspected money laundering offence under the Proceeds of Crime Act 2002 (‘POCA’) will often arise from the context of an investigation into its ‘predicate offence’ (the crime that has generated the proceeds).
For example, where a suspect is investigated for bribery, fraud or tax evasion (or even, theoretically at least, more minor offences such as burglary or shoplifting), a perusal of their bank accounts or a search of their home may give rise to evidence of laundering, by themselves or by someone else (perhaps a family member or a business associate).
The level of complexity and sophistication involved in the suspected laundering will vary hugely from one scenario to another, but in most cases, the investigation of it will continue to run alongside that of the suspected predicate offence.
A separate investigation
In a minority of cases, however, the suspected laundering will be the subject of a separate investigation. At the risk of oversimplifying, these cases will typically fall into one of two categories.
The first category is where there is no criminal investigation in this jurisdiction into the suspected predicate offence. This may be because the person suspected of that offence is deceased, or absent from the jurisdiction (and either there is no realistic prospect of their return, or the predicate offence is being dealt with satisfactorily by authorities overseas).
Equally, however, it may be because there is insufficient evidence (at least at the outset) to pursue any predicate offence, and it is the circumstances of the laundering itself that are the core of the investigation.
A parallel investigation
The second, and rarer, category of separate money laundering investigation is where one or more predicate offences are being investigated, but the nature of the suspected laundering, or the person or entity carrying it out, is such that the case naturally warrants separate scrutiny.
An example of this would be where professional laundering activity is carried out, under the guise perhaps of a money services business, and may be the handling the proceeds of several offences for several predicate offenders.
Where it is less clear that deliberate laundering (in other words, with knowledge) has taken place, and the issues are more about a failure to apply appropriate checks under the regulations or to make required disclosures under POCA, this may be more the province (initially at least) of the appropriate supervising agency (such as the Financial Conduct Authority or HM Revenue and Customs).
Sources of intelligence
The potential sources from which an investigator may learn of a suspected money laundering offence will of course include (as for other offences) complainants, other informants, and proactive research, as well as information or requests for assistance from authorities overseas.
But for money laundering offences in particular, another vast potential source of information is the regime established by Part 7 of POCA and the money laundering regulations, by which banks and other regulated-sector entities are obliged to disclose suspicions that laundering has taken place, and the related scheme under POCA by which they and others can request consent to handle funds or other assets, to provide them with a defence against money laundering allegations that may be made against them.
In the years that the regime has been operating so far, the volume of reports has become so vast that the infrastructure to deal with them has struggled to keep up, and it seems likely that the reservoir of intelligence from which money laundering investigations could potentially arise will in many cases remain untapped.
Money Laundering Cases: The Investigator’s Options
Searches, arrests etc
Where evidence of money laundering comes to an investigator’s attention, their options are to some extent the same as in any criminal case. Depending on their particular role and the particular agency they work for, they may apply for warrants to search premises and seize items there, arrest and interview suspects, and consider placing them on bail (with or without conditions), under the Police and Criminal Evidence Act 1984 (‘PACE’) or other applicable legislation. At some stage, they may put together a file to be considered for potential prosecution (although the investigation does not necessarily end there).
In the meantime, the investigator, or an accredited financial investigator (‘AFI’) working alongside them, will want to consider the options available to them under the various parts of the Proceeds of Crime Act 2002 (‘POCA’). Under Part 2, they will need to consider whether they have reasonable grounds to suspect that anyone has benefited (which here means simply ‘obtained property’) as a result of or in connection with an offence, in which case, they can obtain a restraint order in respect of assets that belong to that person, or that represent a ‘tainted gift’ from that person. Ultimately, those assets may be considered ‘available’ to the person if they are convicted and ordered to pay a confiscation order.
The investigator will also need to consider the options available to him under Part 5 of POCA. This concerns civil recovery, the primary basis of which is that assets can be recovered by court order, based on the civil standard of proof and without a criminal conviction.
While the traditional route for civil recovery was proof in the High Court that the assets represent the proceeds of ‘unlawful conduct’, there is a subset of it, which takes place in the magistrates’ court, where cash, certain assets, and funds in bank and building society accounts can be forfeited either on that basis, or because they can be shown to be ‘intended for use’ in unlawful conduct. (Confusingly perhaps, the courts have held that this can cover cases where cash is intended for use in money laundering.)
This may be significant in a money laundering investigation where cash, funds or other assets are identified but the authorities do not (yet) have either a reasonable basis to suspect their owner, or a good enough case about their origin to persuade the High Court to freeze them.
There is an obligation to specify at least a category (or categories) of offences (of which the assets are said to represent the proceeds), although it seems the courts will accept ‘money laundering’ as such a category (even without specificity about the alleged predicate conduct).
The boundaries of the civil recovery regime are also now extended by the availability of unexplained wealth orders (‘UWOs’), which are designed to trigger a presumption that assets are recoverable where the holder of them does not respond to an order to explain (in broad terms) how he acquired his interest in them.
In practice, the availability of these orders provides a further option in a money laundering investigation, provided various criteria are met: the assets in question must be worth at least £50,000, and the holder of them must either be
- a politically exposed person (someone who is or has been entrusted with a prominent public function by an international organisation or a state, in this context excluding the UK or another EEA state, or a family member or close associate of such a person);
- reasonably suspected of involvement in serious crime in the UK or abroad; or
- (in each case) connected with someone in that category.
Thanks to a recent change in the law, an additional requirement, that the known sources of the holder’s legitimate income would be insufficient to explain their interest in the property, does not apply where there are reasonable grounds to suspect that the property represents the proceeds of unlawful conduct.
While a statement made by someone in response to a UWO cannot generally be used in proceedings against them, it may provide valuable intelligence against them or others involved in a money laundering investigation.
The National Crime Agency (‘NCA’) also has powers under Part 6 of POCA to step into the shoes and adopt the functions of the tax authorities in respect of persons suspected of crime. This may be appropriate where a suspect in a money laundering investigation has substantial assets that may represent the benefit of either lawful or unlawful trading, there is the potential to recover significant assets from him via the tax system, and the expertise of the NCA may increase that potential.
Where the trigger for an investigation is a consent request under Part 7 of POCA, for example from a bank that has suspicions about funds in a customer’s account, the investigator will also need to consider the statutory timescales within which consent will be deemed granted. A refusal within seven working days will trigger a moratorium period of a further 31 calendar days, which is designed to allow the investigator time to consider and apply for orders to restrain or freeze the assets where appropriate.
The investigator may apply for extensions of that period if he can show that his investigation is proceeding diligently and expeditiously and that more time is needed. In practice, banks and others may be cautious about dealing with assets they regard as suspicious even where they have deemed consent to do so. They may be prepared to assist investigators by blocking access to the assets for longer periods.
Various powers are available to various investigators under Part 8 of POCA in the context of criminal money laundering investigations (as well as in other related contexts such as confiscation, civil recovery, and detained cash). Very broadly speaking, they can apply to the courts for:
- production orders, against persons that hold relevant material;
- warrants, to search premises and to seize items found there (either where production orders have not been complied with, or otherwise);
- disclosure orders, to enable notices to oblige persons to provide relevant information; and
- orders against financial institutions to provide information about their customers, or about ongoing activity on their accounts.
Money Laundering Cases: Prosecutions
Is a prosecution inevitable?
Given the seriousness with which the Proceeds of Crime Act 2002 (‘POCA’) treats money laundering offences (with maximum sentences of 14 years for the main offences), it may seem inevitable that where the authorities have sufficient evidence to prosecute, they will do so (absent seriously compelling public interest factors against).
It must be remembered, however, that the concept of money laundering under POCA is sufficiently broad that there are necessarily huge numbers of cases where relatively low-level crime (such as shoplifting, low-value benefit fraud, and some drugs offences) is dealt with by way of simple or conditional cautions, and the laundering that (technically speaking) may have taken place is either included in that outcome, or not pursued at all.
Similarly, where a prosecution is brought for a predicate offence, charges of laundering (against the offender or others) may either not be brought at all (for instance where the laundering charge adds nothing to the overall criminality), or discontinued later (the typical example of the latter being laundering charges against a spouse or partner, which fall away when the main target pleads guilty to the predicate offence).
In many cases, too, it must also be noted that the actions of regulated-sector individuals or businesses will be dealt with by their supervising agencies (such as the Financial Conduct Authority or HM Revenue and Customs), even those that amount to offences under POCA (perhaps possessing on the basis of suspicion alone, or failing to report where there were objective reasons to suspect) as well as the money laundering regulations.
Those circumstances aside, the only other viable alternative to prosecution (in appropriate cases) will be to pursue relevant assets by way of civil recovery under Part 5 of POCA. This may be done because the evidence is judged not to meet the standard required in a criminal case (the issues being narrower, and the standard lower, in the civil context), or as a pragmatic method of achieving a just outcome in appropriate cases, perhaps after negotiation with the potential defendant.
Deferred prosecution agreements
While not strictly an alternative to prosecution, the relatively new procedure of Deferred Prosecution Agreements (DPAs) under the Crime and Courts Act 2013 is another method (for corporate defendants only) of achieving a just outcome without a conviction, and again, may be negotiated with the potential defendant in appropriate cases. While the examples so far have mainly been in large scale bribery cases, money laundering is one of the offences for which the Act allows a DPA to be considered.
The typical issues
In many ways the issues in a prosecution for money laundering are the same as those that arise in any criminal case. From the prosecution’s point of view, the aim is to present sufficient admissible evidence to prove each element of the offence or offences concerned, while complying with its obligations to disclose relevant unused material to the defence. From the defence’s point of view, the aim is simply to stop that occurring, either by legal argument (such as an application to dismiss or stay) or by a challenge to the asserted facts of the case.
In a prosecution for one of the main money laundering offences (under sections 327, 328 of 329 of POCA, or a conspiracy to commit such an offence), the issues that are likely to be key to the case are:
- whether the property in question can be shown to represent the proceeds of crime (which can be proved either directly, or by inviting an inference from the circumstances in which the property was handled); and
- whether the defendant had the requisite knowledge or suspicion that this was so.
In an arrangements case (under section 328 of POCA) there may be additional issues about the defendant’s involvement in such arrangements and what they were intended to do. In a conspiracy case, the extent of the defendant’s knowledge will need to be greater.
If the nature of the defendant’s challenge (if any) is not clear from his interview or interviews under caution, then it should become clear when he submits his compulsory defence statement. In any event, the disclosure officer and the prosecuting lawyer will need to consider carefully the relevance of all material held to those core issues, with a view to disclosing, for instance, any material that tends to suggest either that the property had a legitimate source or was being handled in a legitimate way, or that the defendant had an honest belief that this was so.
It will not be unusual for criminal proceedings, particularly dealing with charges of money laundering, to be accompanied by ongoing civil proceedings. Insofar as there is an overlap between the subject matter of civil recovery proceedings on one hand and criminal proceedings on the other, it will be often appropriate (given, in particular, the risk of self-incrimination on the part of the defendant/s) to adjourn the former pending the conclusion of the latter. However, consideration may be given to obtaining freezing orders to prevent the dissipation of assets and to applying for the appointment of receivers to preserve their value.
While self-incrimination considerations may prompt resistance from defendants to the use of unexplained wealth orders, production orders and disclosure orders, in each case there are specific provisions to prevent the information or material provided being used in criminal proceedings (with certain exceptions). Rightly or wrongly, the legislation clearly contemplates the use of such powers to gather intelligence (rather than evidence) against suspects and defendants, with no restriction on their use even while criminal proceedings are ongoing.
The Sentencing Council has published guidelines applicable to bribery, fraud, and money laundering. A prosecutor will need to have regard to these when making representations about the seriousness of the alleged offence for the purposes of bail and mode of trial, as well as following conviction. Broadly speaking, the guidelines take account of both the amount of money involved in the laundering, and the extent of the defendant’s role in it (for instance his seniority or otherwise where he was one of a group, and the sophistication or otherwise of the method used).
A handful of cases each year reach the Court of Appeal and form a growing body of judicial comment on the range of proportionate sentences for the primary money laundering offences, in which two issues recur with some regularity.
The first is whether, when a defendant is convicted of both money laundering and its predicate offence, the resulting sentences should be consecutive to or concurrent with each other (the broad answer to which seems to be that it depends on the extent to which the laundering adds significantly to the overall criminality).
The second is, where the predicate offence is known but has been committed by someone else, the extent to which the maximum sentences and any applicable guidelines for that predicate offence should be considered when sentencing the launderer. The broad answer seems to be a very rough compromise in which a serious predicate offence, for instance, drug trafficking, can raise the bar for sentencing significantly, though not so much that it reaches the same territory as the predicate offence itself.
One consequence of a defendant being convicted of any acquisitive offence is that the court will have to consider making a confiscation order. In cases where the statutory assumptions of ‘criminal lifestyle’ apply (which will include most money laundering cases), the calculation of his benefit will take into account years’ worth of ‘general criminal conduct’, but in other cases the court will need to quantify the defendant’s benefit from the particular offence with which he has been convicted.
This may present a particular issue for a defendant convicted of acquiring or possessing criminal property, who may technically have ‘obtained’ the total value of that property in connection with his offence, although in most cases he will then have passed it on (minus a commission, perhaps) to someone else.
The law on confiscation is complex and ever evolving, and at present the position seems to turn unsatisfactorily on two questions. The first question is whether the extent of the defendant’s role in relation to the property was such that he could be said to have ‘obtained’ it. The second question is the subjective and inherently unpredictable one of whether the outcome of that enquiry (in the context of the confiscation process as a whole) would amount to a disproportionate interference with the defendant’s property rights.
In addition to confiscation, the court may also be invited to consider other ancillary orders, for instance to disqualify the defendant from acting as a director of a company, or to require them to provide regular reports on their financial affairs, for a specified period.
Anti-Money Laundering (AML): Advice to Clients
Perspectives on the law
Any aspect of the criminal law can potentially give rise to a need for advice from three distinct categories of people: those who are suspected of an offence; those who are otherwise involved in an investigation (for instance as a complainant or a witness); and those who, for a variety of reasons, need advice on how best to comply with the law, or in other words, avoid or prevent the commission of an offence.
It can be tempting to see the differences between those categories as broader than it is. On the very superficial level, the individual caught holding a bag full of bank notes presents very differently from the multinational corporation that wants to brush up on its compliance procedures. But in strict legal terms, the offences to advise upon are generally the same for each of them.
The regulated sector
In money laundering and terrorist financing, the position is made more complicated because the regulated sector (as listed in the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TA)) has additional obligations arising from money laundering regulations (MLRs), and there are additional offences that can be engaged (broadly speaking, by breaching those obligations, by failing to report, or by ‘tipping off’ a suspect that a report has been made).
Again, the circumstances in which a person’s need for advice can arise are threefold – because they are suspects, because they are witnesses, or because they are proactively seeking help with compliance. But the difference is that, in many circumstances at least, the enforcement of these obligations is likely to be policed not by a law enforcement agency, but by the supervising agency responsible for their particular type of business (such as the Financial Conduct Authority (‘FCA’) or HM Revenue and Customs).
A clash of interests?
The scheme of anti-money laundering (‘AML’) and counter-terrorist financing (‘CTF’) law is such that, in a vast number of common scenarios and on an extremely frequent basis, the interests of these people – all, technically speaking, potential offenders in the eyes of the criminal law – are pitted against each other.
The individual with the bag full of cash who wants to deposit it into a bank account, to take a simple example, may be asked questions by the bank and become the subject of a Suspicious Activity Report (SAR) submitted by it to the National Crime Agency (NCA).
If the bank fails to do this, or tells the individual that it has submitted a SAR, then it is at risk not only of awkward questions and fines from the FCA, but of liability for serious criminal offences of acquiring criminal property, failing to report, and breaches of the MLRs.
The fundamentals of this scheme have, over the decades that it has been in force, led to a large and sophisticated compliance sector, especially in the major banks, which in some ways has taken over much of the function of policing financial crime.
A plethora of powers
The other complication in advising people about money laundering and terrorist financing is the large and increasing array of powers that can be brought into play by law enforcement. In addition to the usual powers to arrest, bail, charge, interview, search and seize property that apply in criminal law generally, there are specific investigative powers (including production and disclosure orders, and orders against financial institutions), as well as various powers to restrain, freeze or block access to relevant assets. Whatever the capacity of the person seeking it, advice on this area needs to consider all these aspects of the law, and how they interact with each other in practice.