Money  Laundering and the Proceeds of Crime

There are tough rules to crack down on  money laundering and the proceeds of crime. These rules affect a wide range of  people and we consider how your organisation may be affected.

Money  laundering - a definition

Most of us imagine money launderers to be  criminals involved in drug trafficking or terrorism or to be someone like Al  Capone. However, legislation  in the last  two decades  has expanded significantly the  definition of what we might have traditionally considered as money laundering.  While the general principles remain; money laundering involves turning the  proceeds of crime into apparently 'innocent' funds with no obvious link to  their criminal origins, what  should be remembered  is that the definition  includes the proceeds of any  criminal offence, regardless of the amount involved.

The rules

The key pieces of legislation are:

• the Proceeds of Crime Act 2002  (The Act) as amended by the Serious Organised Crime and Police Act 2005, and
• the Money Laundering Financing  and Transfer of Funds (Information on the Payer) Regulations  2017  (The  2017  Regulations).

The Act

When  first issued the Act re-defined  money laundering and the money laundering offences,  to cover  the proceeds of any crime (not just serious crime) and created  mechanisms for investigating and recovering the proceeds of crime. The Act also   revised  and  consolidated  the requirement for those affected to report knowledge, suspicion or reasonable  grounds to suspect money laundering. See the panel below for some of the more  technical terms of the Act.

The  2017  Regulations

The  2017  Regulations came into effect on 26 June 2017. They replaced the 2007  Regulations and implement the EU Fourth Money Laundering Directive. As before,  the Regulations contain the detailed procedural requirements for  those affected by the legislation , but have been  significantly updated and in some areas, expanded compared to the previous  version.

Proceeds  of Crime Act - technical terms

Under the Act, someone is engaged in money  laundering if they:

• conceal, disguise, convert,  transfer or remove (from the United Kingdom) criminal property
• enter into, or become  concerned in, an arrangement which they know or  suspect facilitates (by whatever means) the acquisition, retention, use or  control of criminal property by or on behalf of another person or
• acquire, use or have possession  of criminal property.

Property is criminal property if it:

• constitutes a person's benefit  in whole or in part (including pecuniary and proprietary benefit) from criminal  conduct or
• represents such a benefit  directly or indirectly, in whole or in part and
• the alleged offender knows or  suspects that it constitutes or represents such a benefit.

Who is caught  by the legislation?

The regulated sector

The legislation relates to anyone in what  is termed as the 'regulated sector', which includes but is not limited to:

• credit  institutions
• financial institutions
• auditors, insolvency  practitioners, external accountants and tax advisers
• independent legal  professionals
• trust or company service  providers
• estate agents
• high value dealers
• casinos.

The  implications of being in the regulated sector

Those businesses that fall within the  definition are required to establish procedures to:

• identify and assess the  risks of money laundering and terrorist financing to which they are subject and  manage that risk
• apply customer due diligence  procedures (see below)
• keep appropriate records
• appoint a Money Laundering  Nominated Officer (MLNO) to whom money laundering reports must be made
• appoint a member of the  board or senior management as the officer responsible for compliance with the  Regulations (this may be the same person as the MLNO)
• establish systems and  procedures to forestall and prevent money laundering
• monitor and manage  compliance with, and communication of, the policies and procedures  and
• provide relevant individuals  with training on money laundering and awareness of their procedures in relation  to money laundering.

If your business is caught by the  definition you may have received guidance from your professional or trade body  on how the requirements affect you and your business. Those of you who are  classified as High Value Dealers may be interested in our factsheet of the same  name, which considers how the  2017  Regulations affect those  who make or receive  high value cash  payments.

The  implications for customers of those in the regulated sector

As you can see from the list above, quite a  wide range of professionals and other businesses are affected by the  legislation. Those affected must comply with the laws or face the prospect of  criminal liability (both fines and possible imprisonment) where they do not.

Customer due diligence (CDD)

Under The Regulations, if you operate in  the regulated sector, you are required to undertake CDD procedures on your  customers. These CDD procedures need to be undertaken for both new and existing  customers.
CDD procedures involve:

• identifying your customer and  verifying their identity. This is based on documents or information obtained  from reliable  sources  independent  of the customer
• identifying where there is a  beneficial owner who is not the customer. It is necessary for you to take  reasonable  measures on a risk sensitive basis, to verify the beneficial owner's identity,  so that you are satisfied that you know who the beneficial owner is. The  objective here is to confirm who the beneficial owners are, so for example  obtaining evidence that corroborates the entries in the PSC register (people  with significant control - see separate factsheet) and not simply checking the  ID of the persons listed. The beneficial owners of the business  are those individuals who ultimately own or control the business or who  benefit from the transaction.
• obtaining information on the  customer's  circumstances and business, including the intended  nature of the business relationship.

You must apply CDD when you:

• establish a business  relationship (this now includes forming a company for the  customer)
• carry out an occasional  transaction  that amounts to a transfer  of funds exceeding €1,000
• carry out an occasional  transaction (for example a one off transaction valued at €15,000  or more) where not a casino or high value dealer
• carry out a cash  transaction of €10,000 or more if a high value dealer
• carry out certain gambling  transactions of €2,000 or more if a casino
• suspect money laundering or  terrorist financing
• doubt the reliability or adequacy  of documents or information previously obtained for identification.

CDD measures must also be applied on a risk  sensitive basis at other times to existing customers. This could include when a  customer requires a different service, or  where there is a change in the customer's circumstances.  Businesses must consider why the customer requires the service, the identities  of any other parties involved and any potential for money laundering or  terrorist financing.

The purpose of the CDD is to confirm the  identity of the customer. For the customer's identity to be confirmed,  independent and reliable information is required. Documents which give the  strongest evidence are those issued by a  government  department or agency or a Court, including documents filed at  Companies House. For individuals, documents from highly rated sources that  contain photo identification, eg passports and photo driving  licences,  as well as written details, are a particularly strong source of  verification.

The law requires the records obtained  during the CDD to be maintained for five years after a customer relationship  has ended. It also requires customers to be notified about  how their personal data will be processed and who the data controller is (being  the name of the entity/person registered under Data Protection rules).

Enhanced due diligence

Enhanced CDD and ongoing monitoring must be  applied where:

• the risk of money  laundering or terrorist financing is assessed as high
• the customer is  established in a high-risk third country
• the client is a politically  exposed person or a family member/known close associate of one  (this now includes UK PEPs)
• false or stolen  identification documents or information have been provided and there is still  an intention to act for the customer
• a transaction is complex  and unusually large or has an unusual pattern and there is no apparent legal or  economic purpose
• by its nature there  is a higher risk of money laundering or terrorist financing
• there is a 'correspondent  relationship' with another credit or financial institution.

Additional procedures are required over and  above those applied for normal due diligence in these circumstances.

The above list was amended  in the 2017 Regulations, particularly in now defining politically exposed  persons (PEPs) more widely, including where they are from the UK rather than  just a foreign state. With the increased use of internet or other remote  transactions the requirement to always apply enhanced due diligence where not  meeting the customer face to face has been removed. However, additional checks  will be required to give assurance that identity has been correctly ascertained  and verified if the customer has not been seen.

Reporting

As mentioned above, the definition of money  laundering includes the proceeds of any crime. Those in the regulated sector  are required to report knowledge or suspicion (or where they have reasonable  grounds for knowing or suspecting) that a person is engaged in money  laundering, ie has committed a criminal offence and has benefited from the  proceeds of that crime. These reports should be made in accordance with agreed  internal procedures, firstly to the MLNO, who must decide whether or not to  pass the report on to the National Crime Agency (NCA).

The defences for the MLNO are:

• reasonable excuse (reasons such  as duress and threats to safety might be accepted although there is little case  law in this area )
• they followed Treasury approved  guidance.

The Courts must take such guidance into  account.

National Crime  Agency (NCA)

The NCA is the UK crime-fighting agency  with national and international reach and the mandate and powers to work in  partnership with other law enforcement organisations to bring the full weight  of the law to bear in cutting serious and organised crime. Part of the role of  the NCA is to analyse the suspicious activity reports (SARs) received from  those in the regulated sector and to then disseminate this information to the  relevant law enforcement agency.

The Regulations require those in the  regulated sector to report all suspicions of money laundering to the NCA. By  acting as a coordinating body, the NCA collates information from a number of  different sources. This could potentially build up a picture of the criminal  activities of a particular individual, which only become apparent when looked  at as a whole. This information can then be passed on to the relevant  authorities to take action. More detail on the activities of the NCA can be  found on their website www.nationalcrimeagency.gov.uk.

Is your business  vulnerable?

Criminals are constantly searching for new  contacts to help them with their money laundering  or  terrorist financing. Certain types of business are more vulnerable  than others. For example, any business that uses or receives significant  amounts of cash can be particularly attractive. To counter this, the  Regulations require businesses that deal in goods and accept cash equivalent to  €10,000 or more  to register with HMRC and implement anti-money laundering procedures. Such  businesses are known as High Value Dealers (HVD).

You can imagine that if a drug dealer went  along to a bank on Monday morning and tried to pay in the weekend's takings,  the bank would notice it and report it unless the sum was relatively small. If  criminals can find a legitimate business to help them by taking the cash and  pretending that it is the business's money being paid in (in exchange for a  proportion!), then that business can put the cash into the bank without any  questions being asked.

Take, for example,  the mobile telephone business that has had a fairly steady turnover of £10,000  per week for the last couple of years but suddenly begins to bank £100,000 in  cash each week. Without a clear, rational and plausible explanation, this  type of suspicious activity would clearly be reported to the NCA.

Perhaps a less obvious example of possible  money laundering could be where an individual comes into an antiques shop and  offers to buy a piece of furniture for £12,000 in cash. Not too many sellers  would have insisted upon a cheque in the past! Now the HVD will need to  consider the risk of money laundering and as a minimum carry out customer due  diligence before accepting such a cash amount. This person may be  a money launderer who then goes to another shop and sells the antique for say  £8,000, being quite prepared to suffer the apparent loss. This time the  criminal asks for a cheque that can then be paid innocently into a bank  account, making the money look legitimate.

The legislation aims to put a stop to this  type of activity. Those in the regulated sector are required to report any  transactions that they have suspicions about. Also, it is not simply the more  obvious examples of suspicious activities that have to be reported. For the  majority of those regulated, the government has insisted upon there being no de  minimis limits within the legislation. This means that very small proceeds of  crime have to be reported to the NCA.

Tipping off

There is also an offence known as 'tipping  off' under the Act. This is what would happen if a person in the regulated  sector were to reveal that a suspicious activity report had been made, say for  example about a customer, to that customer. Where this disclosure would be  likely to prejudice any investigation by the authorities, an offence may be  committed. A tipping off offence may also be committed where a person in the  regulated sector discloses that an investigation into allegations that a money  laundering offence has been committed is being contemplated or carried out, and  again, that this disclosure would be likely to prejudice that investigation. As  you can imagine therefore, if you were to ask an accountant or estate agent  whether they had made any reports about you, they would not be able to discuss  this with you at all. If they did, they could break the law and could face a  fine or imprisonment, or both.

How we can help

The legislation brings a number of  professions and businesses into the regulated sector. Complying with the  requirements of both the Act and the  2017  Regulations requires those affected to introduce a number of procedures to  ensure that they meet their legal responsibilities. If you would like to  discuss how the legislation could affect you and your organisation please do  contact us.