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Section 2: Money Laundering and the Proceeds of Crime Introduction ML involves financial transactions where proceeds from serious crime are 'cleaned' so that its source cannot be traced. It can also involve simply receiving/benefiting from the proceeds of crime. The COLP and COFA and management of a firm are responsible for ensuring all steps required to comply with the Money Laundering Regulations 2007 and Proceeds of Crime Act 2002 and Terrorism Act 2000, to ensure no offence has been committed by the firm/its personnel. A solicitor is at risk from ML when the launderer tries to deposit cash into a firm's client account. Warning Signs Chapter 11 of the AML Practice Note contains several warning signs:
Instructions outside your firm's area of expertise : beware of taking on work in which the firm has no background, but in which the client claims to be an expert. o
Also consider your obligations under Principle 4 and 5.
Unusual retainers (e.g. a dispute which settles too easily may be sham litigation)
Use of client accounts: e.g. a client deposits funds into your account but ends the transaction for no apparent reason. Solicitors should not provide a banking service for their clients.
Setting up a trust: consider if the purpose of the trust could be to launder criminal property. Ascertain the purpose of the trust and why any unusual jurisdiction/structure is being used.
Suspicious fact patterns: this will be scenario-based, but look for suspicious and unusual occurrences.
Jurisdictions with a heightened money laundering risk The Financial Action Task Force (FATF) has identified a number of jurisdictions with heightened ML risk. The top ones are Iran and Korea but there are twenty or so others. It will be obvious in the exam.
Offences under PoCA, Part 7 i) Direct Involvement Offences - ss.327-329 There are three direct involvement offences:
s.327 - concealing, disguising, converting, transferring, removing criminal property from the UK
s.328 - entering into/becoming concerned in an arrangement which you know/suspect facilitates the acquisition/control of criminal property by/on behalf of another person.
s.329 - acquiring, using or possessing criminal property.
It is quite common for an exam question to point to more than one of the above sections. ii) Failure to disclose to Nominated Officer in the 'regulated sector' - s.330 Under s.330 it is an offence to fail to make a disclosure to the firm's nominated officer (known as the MLRO) or the Serious Organised Crime Agency (SOCA) if:
1. You know/suspect/have reasonable grounds to suspect someone is laundering the proceeds of any criminal conduct;
2. The receive the information in the course of business in the regulated sector;
3. You can identify the person who is laundering the proceeds OR the whereabouts of the laundered property OR that the information referred to in (2) may assist in identifying the person in (1).
The REGULATED SECTOR
* The definition of a business in the regulated sector is found in Schedule 9 PoCA. Included in the list of activities falling into this definition is tax advice and the participation in financial transactions or property transactions, notably: o
The buying/selling of property/business entities
The management of client money/security/other assets
The opening/management of bank, savings, or securities accounts
The organisation of contributions necessary for the creation, operation and management of companies.
The firm's MLRO s.331 places similar obligations upon the MLRO to s.330. However, the MLRO has to make a decision whether or not to report to SOCA (the body authorised to receive ML reports under PoCA). The firm's MLRO will often be the COLP, since the two roles are analogous. If the MLRO decides to make a disclosure by way of a suspicious activity report under s.336, neither the MLRO nor the fee earner should authorise/undertake any prohibited act unless:
Authorised to do so by SOCA
Seven working days has passed from the disclosure and SOCA has not refused authority to proceed.
Tipping off (s.333A)
* Under s.333A it is also an offence to 'tip-off' clients in the regulated sector about any report made.
It is also an offence under s.333A(3) to disclose than an investigation is being contemplated or carried out if the disclosure is likely to prejudice the investigation.
Penalty for offences (s.334)
Fine (or both)
Defences There are a number of defences available. The key defences are:
ss.327(2)-(2A): if the criminal conduct occurred outside the UK and was not criminal in the country in which it occurred (and is not subject of an order made by the SoS).
ss.328(2)-(2A): he intended to make an authorised disclosure but had a reasonable excuse for not doing so.
s.338: making an authorised disclosure (before s.338(1), during s.338(2) or after s.338(3) - the act).
Terrorist Financing The Terrorism Act 2000 makes it an offence to provide any monetary support for terrorist activities. This includes:
s.15 - being involved in fundraising for terrorist purposes.
s.16 - use or possession of money/property for terrorist purposes.
s.17 - being involved in arrangements which fund terrorist activity.
***s.18 - money laundering (e.g. by concealing, removing from the jurisdiction, by transfer).
**s.19 - failing to disclose if you know/suspect that another person has committed a terrorist finance offence based on the information which has come to your attention in the course of trade.
Compliance with the Money Laundering Regulations 2007 (MLR) As well as complying with PoCA (which anticipates the reporting of suspicious transactions where someone benefits from the proceeds of crime), firms to whom the MLR apply must ensure they comply with the MLR in order to identify potential ML and report it as necessary. It is there is ensure firms establish procedures to prevent MR/terrorism. The COLP (as well as the firm's managers) will be responsible for ensuring systems are in place to do this. Who do the MLR relate to? (Regulation 3) Regulation 3(1)(d) is of particular importance to solicitors - applies to independent legal professionals who participate/assist in the planning or execution of financial/property transactions which (pursuant to Regulation 3(9)), concern:
1. The buying/selling of real property or business entities
2. The managing of client money/securities/other assets
3. The opening/management of bank/savings/securities accounts
4. The organisation of contributions necessary for the creation, operation or management of companies
5. The creation/operation/management of trusts, companies etc.
FURTHERMORE, Regulation 3(1)(e) - 'trust or company service providers' can apply - Regulation 3(10) states this means a firm or sole practitioner who by way of business provides any of the following services:
1. Forming companies or other legal persons
2. Acting/arranging for another person to act as a director or secretary of a company, as a partner in a partnership
3. Providing a registered office or business address for a company/partnership
4. Acting/arranging for another person to act as a trustee or a trust or a nominee shareholder for a person other than a company whose securities are listed on a regulated market.
NOTE: the MLR does not apply to employment/most litigation cases. However, in practice most firms take the steps required by the MLR irrespective of whether or not their work is caught under Regulation 3. What steps do the MLR require you to take and when? Regulation 7 Pursuant to Regulation 7, when a person to whom the MLR applies is:
Establishing a business relationship
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