Money laundering - The story so far

Relatively few practitioners have given very much thought to how the money laundering laws might affect them, say Phil Shohet and Andrew Jenner.

Mention the words money laundering and events like 9/11 and other high profile terrorist attacks spring to mind. And when it comes to money laundering legislation, one instantly makes the same connection. Naturally enough one imagines highly focused law designed to tackle remote national dangers; nothing much to do with the clients and business of the average high street accountant.

So, it is really no surprise to discover that relatively few practitioners have given very much thought to how the money laundering laws might affect them. While equally few, if our impression from talking with countless practising accountants is anything to go by, have seen any need to make reports to the National Criminal Investigation Service (NCIS) in compliance with the new laws. After all, they don't have the sort of clients who engage in international terrorism or drug running, do they? Perish the thought.

To take such a view, however, is to forget the government's well earned reputation for spin. Just as weapons of mass destruction provided the excuse for urgent military action, so has international terrorism provided the justification for laws that are, for the most part, directed considerably closer to home. For instance, in enlisting tax accountants as part of a Revenue & Customs snoopers' army to shop clients who may be involved in tax evasion - suspicion or reasonable grounds for suspicion are all that is required to make reporting mandatory with up to 14 years imprisonment the draconian penalty for failure to report.

In fact, as the Revenue readily admits, there is actually no need for any money laundering as such to generate a money laundering reporting requirement under the Proceeds of Crime Act 2002, the law which updates, expands and unifies the money laundering offences. The Revenue explains in its public anti-money laundering strategy document: 'All that is needed is the acquisition, use or even possession of criminal property for money laundering offences to apply. So the mere possession of the proceeds of tax evasion in someone's wallet is sufficient for money laundering to have taken place.'

The Revenue candidly acknowledges: 'The definition has clearly been extended some way beyond traditional views of what money laundering is like.'

What amounts to suspicion?

Crucial to the scope of the reporting requirement is the question of what amounts to suspicion. And here there is something of a government cop out. For suspicion has not been defined anywhere in the existing legislation.

The best that can be gleaned from case law and other authoritative opinion is that suspicion is more than mere speculation but falls short of proof or knowledge. So the onus is left on the accountant to judge by asking the usual range of questions familiar to audit work and other financial investigations.

So suspicion might be generated because the client's trading ratios appear inconsistent with industry norms. Or maybe the client's lifestyle seems to be inconsistent with his or her financial circumstances. Perhaps the turnover is not consistent with the size of the business. Or large third party deposits may on occasion be deposited to the client's bank accounts.

Even evasive or vague explanations by the client may be enough to warrant suspicion under the terms of the legislation. We'll probably only know for sure as a result of the prosecution of a practising accountant.

What is clear, however, is that the sort of behaviour that the Revenue would regard as reportable goes well beyond what one might well assume - even where tax liability has been accurately disclosed. Say, for instance, that you are aware that your client is in financial difficulty and plans to pay all creditors apart from the Revenue prior to declaring himself bankrupt. The law is clear. As he plans to prefer ordinary creditors at the expense of the Revenue, the accountant is required to file a report.

How far does it go?

Just how far the reporting requirement goes has been well illustrated by the facts of a Court of Appeal case whose outcome has recently caused much celebration in the legal profession. The case of Bowman v Fels, decided in March, concerned what appeared to be a run-of-the-mill dispute between former cohabitants for 10 years over the ownership of their home, registered in the sole name of the defendant.

The snag was that in the course of the litigation the solicitor representing the claimant became suspicious that the defendant had included the cost of work carried out at the property in his business accounts and in his VAT returns even though this work was completely unconnected to his business.

Just the sort of information that the Revenue is anxious to gather through Proceeds of Crime Act reports to NCIS. Equally, just the sort of reports that the Revenue would like to see pouring in from accountants.

In Bowman v Fels the issue before the court of appeal arose out of the decision of Anthony Daniels, a partner in north London solicitors Levine Mellins Klarfeld, to make a report to NCIS as a result of the suspicions he had formed on inspecting documents disclosed by the defendant as part of the litigation process. But in seeking an adjournment to allow for the consequent delay awaiting NCIS 'appropriate consent' to proceed, Daniels sought to conceal from the other side that he had made a report for fear of falling foul of the legislation's 'tipping off' prohibition. In all of this the solicitor felt that he was complying with the law as previously confirmed in 2003 by a decision of High Court judge Dame Elizabeth Butler-Sloss.

No matter that by the time the Appeal Court was due to hear the case, it had been settled through agreement by the parties. By now the Law Society, Bar Council and NCIS had jumped aboard the litigation as intervenors.

So the court ploughed on as 'to send them away empty-handed on an issue of such importance seemed to be not only churlish but also in breach of the overriding objective which illuminates all civil court practice today'.

No prizes, then, for guessing which way the wind was blowing in the Court of Appeal. Right at the commencement of the court's judgment, Lord Justice Brooke noted that the language of the legislation has caused great uncertainty 'particularly because parliament has given a much wider meaning to the phrases "criminal conduct" and "criminal property" than was required by the relevant EU directive.'

And he duly concluded that the legislation 'is not intended to cover or affect the ordinary conduct of litigation by legal professionals' as parliament cannot have intended that this would 'involve them in "becoming concerned in an arrangement which … facilitates the acquisition, retention, use or control of criminal property" even if they suspected that the outcome of such proceedings might have such an effect.'

Having wedged the stable door open, the court galloped on adding 'it seems implausible to suggest that it (the legislation) was intended to apply to legal professionals negotiating or implementing a consensual resolution of issues in a litigious context'.

Legal professional privilege

Furthermore the court noted approvingly comments of Lord Hoffman in Morgan Grenfell v Special Commissioner for Income Tax (2002) that 'legal professional privilege is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.'

The EU directive, concluded the appeal court, 'contained no suggestion that lawyers might be required to disclose to the relevant authorities information which came to their attention in circumstances to which legal professional privilege attached'.

One might well imagine from the failure of so many accountants to report routinely their suspicions to NCIS that they suppose there exists some sort of concept of accountancy professional privilege. Maybe there should be, given the huge hole in the reporting requirements that lawyers have managed so successfully to prise open.

Phil Shohet and Andrew Jenner are directors of KATO consultancy

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