UK: Money Laundering Dilemmas in Practice

A recent decision of the Commercial Court considers the position of institutions which suspect that funds in their possession are the proceeds of crime. Amalgamated Metal Trading Ltd v City of London Police Financial Investigation Unit and others [2003] EWHC 703 (Comm) is a warning of the pitfalls of adopting the wrong procedural route when attempting to resolve the conflicts between the money laundering regime and the imposition of civil liability. It also adopts the theme, notable in the earlier Bank of Scotland decision, that institutions must bear some of the commercial risks that arise when money laundering is suspected.

In the Amalgamated Metal case, the claimant, a ring dealing member of the London Metal Exchange (AMT), found itself in a dilemma when it developed concerns about the integrity of one of its customers, a Dubai company known as Wavesmetco. AMT was particularly concerned about the receipt of large sums of money from two groups of companies which had collapsed with massive losses. The liquidators of those companies had alleged that the collapse was the result of a massive fraud, and it was the liquidators' view that the trading funds or working capital of Wavesmetco were likely to be funds that could be traced back to that alleged fraud. Following discussions with Wavesmetco, AMT closed out all its remaining positions. This left AMT holding a credit balance in favour of Wavesmetco in the sum of US$450,000. The difficulty for AMT was what to do with the $450,000.

AMT sought the permission of the City of London police to pay the $450,000 to Wavesmetco (which was treated as an application for consent pursuant to section 93A(3)(b)(i) of the Criminal Justice Act 1988). The police refused. AMT then began proceedings against the police seeking a declaration that the sum was not the proceeds of crime, and also applied for an interim declaratory judgement to the same effect.

The subsequent procedural steps were complex. Amongst other developments, the application for the interim declaratory judgment was dismissed, the police were replaced as defendants by the Serious Fraud Office (SFO), Wavesmetco was joined as a defendant, and the action against the SFO was stayed. The result was that AMT sought against Wavesmetco a declaration that the funds were not the proceeds of crime, when Wavesmetco supported this position. Wavesmetco counterclaimed for the funds to be paid out by AMT.

In light of the Amalgamated Metal case, this e-bulletin sets out those circumstances in which the courts may be prepared to give guidance to assist in resolving such issues.

1. Disclosure orders

When an institution is faced with a disclosure order and where compliance with the order would amount to a tipping-off offence, the relevant guidance is contained in the Court of Appeal’s decision in C v S and Others [1999]2 All ER 343. Whilst the issue arose in the context of civil proceedings, the procedure could be adapted in any case where disclosure to a body other than National Criminal Intelligence Service (NCIS) is required.

The suggested procedure, which should be adapted to the circumstances of the particular case, includes:

• When an institution is aware that a party intends to apply for, or has obtained, an order for discovery which might involve the disclosure of information which could prejudice an investigation, it should inform NCIS.
• NCIS should be given an opportunity to identify material it does not wish to be disclosed.
• The applicant may be satisfied by partial disclosure. What, if any, explanation can be given for partial disclosure will depend on what can be agreed with NCIS.
• If partial disclosure cannot be agreed and/or it cannot be explained that only partial disclosure has been given, then the directions of the court must be sought.
• It will be for the court to determine what evidence it requires – a letter from NCIS may suffice, or NCIS may need to attend, or even be made a party to the proceedings. It is for NCIS to persuade the court that disclosure of the documents or the explanation would give rise to a real likelihood of prejudice to an investigation.

Further guidance was given on the extent to which the party seeking disclosure can and should be involved in the proceedings, the possibility of adjournment, and related matters.

2. Tipping off concerns

Where NCIS refuse consent to a transaction and there are concerns about tipping off, the guidance in Bank of Scotland v A Limited [2001] 1 WLR 751 is relevant. In summary, one approach in light of that guidance is that:

• Where consent to a transaction is refused, NCIS or the relevant authority and the bank should try to resolve between themselves what can be relied on to defend any proceedings brought by the customer and/or what reason can be given to the customer for limited disclosure.
• If an agreement cannot be reached, then that can be the subject of an application for interim declaratory relief. The appropriate defendant to such an application for directions is NCIS or other relevant authority.
• The court’s declaration will set out the information it would be proper for the bank to rely on. In acting in accordance with the court’s order, the bank will not be committing a tipping off offence.
• Unless NCIS acts unreasonably, it is likely that the parties will have to bear their own costs of the application.
• If the bank’s customer brings proceedings, the bank must take a commercial decision whether to contest them.

3. Defending claims by customers for the return of funds where consent has been refused

Based on the current guidance, the position appears to be as follows:

• It is a commercial decision for the bank whether to defend the proceedings;
• It is inconceivable that there could be criminal proceedings against an institution for continuing a transaction when it has taken reasonable steps to resist proceedings but is nonetheless ordered by the court to pay over money which is subsequently proved to be the proceeds of crime. It is implicit from this that the bank may not simply refuse to defend the proceedings if there is an arguable defence;
• Although each case depends on its own facts, the court is unlikely to require institutions to run defences that, in the view of their reasonable legal advisers, are unsustainable on the basis of the available evidence;
• The information the bank can rely on is its defence is dealt with at section 2 above;
• If the bank is ordered to pay the funds out, it is unlikely to incur accessory liability to the victim of the crime since it would lack the necessary dishonesty.

4. Challenging NCIS’s refusal to consent to a transaction

Amalgamated Metal makes clear that an institution should not challenge a refusal to consent by way of seeking a declaration that funds are not the proceeds of crime. This leaves open the possibility of judicial review of a decision by NCIS to refuse consent to a transaction. However, there may be significant legal difficulties in mounting such a challenge.

5. Resolving constructive trust issues

Where the bank wishes to pay out funds but is concerned about its potential liability as a constructive trustee, the position is as follows:

• The institution could seek a declaration that the funds are not the proceeds of crime.
• It is not appropriate to seek such a declaration against the police. In our view, the appropriate parties to the action are the institution, its customer and the victim, if known. If the victim is not known, the court may not be prepared to entertain the application.
• The court is unlikely to ever grant an interim declaration that particular funds are not the proceeds of crime. The court would only pronounce on the matter on a final basis.
• The court would not make such a declaration based on an absence of evidence that funds were the proceeds of crime; it would require positive evidence that they were not.

Conclusion

There are a number of options open to financial institutions when faced with a dilemma regarding possible money laundering. It is easier to deal with the criminal issues and avoid liability for tipping off than it is to avoid possible civil liability and legal costs. It is therefore important that in any such situation, a clear strategy is identified from the outset, so that costs are not wasted on unnecessary court applications.

Whilst the cases referred to above concerned the Criminal Justice Act 1988, similar difficulties will arise under the Proceeds of Crime Act 2002. Indeed, tipping-off will become a more common issue because of the increased level of reporting that the Act will require.

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