UK: Money Laundering – Giving Solicitors the Key to the Gate

At the time of our previous article, "Money Laundering – Red Alert" (Winter 2001 edition), the impact of the money laundering legislation on solicitors was limited, although major changes were on the horizon amidst criticism that the profession was ignoring its responsibilities as "gatekeepers" facilitating or blocking the entry of "dirty money" into the system.

Two years on, the Second EC Money Laundering Directive, which will extend the scope of the Money Laundering Regulations 1993 to most solicitors firms (currently strictly applying only to solicitors engaged in investment business and mainstream financial services, "the Regulated Sector") has not been implemented, although this was due to take place in June 2003. The Regulations will focus mainly on client identification and reporting procedures, training and record keeping. The latest draft of the Money Laundering Regulations 2003 was laid before parliament at the end of November 2003, but is not yet publicly available. We will report further in Part 2 of this article on the rules applying to solicitors once the Regulations and any accompanying Law Society guidance have been published.

The Proceeds of Crime Act (2002) ("the Act") has become law, expanding, reforming and consolidating previous legislation and enacting a series of serious criminal offences. A summary of the key provisions applying to all solicitors is set out in "The Proceeds of Crime Act 2002 – Key Provisions".

The provisions of the Act have caused much concern amongst the profession:

• There is a tension between the duty to disclose suspicions of money laundering, which arises very readily, avoiding tipping off the party concerned, and the solicitor’s duties to act in the client’s best interests and to disclose all relevant information to the client.
• The solicitor must balance the requirement to disclose suspicion against the risk of prejudicing the client’s interests through over zealous reporting. (Although disclosures to the NCIS are protected from actions by the client for breach of contract, it is still good practice to amend terms of business to reserve the right to make disclosures as appropriate.)
• Difficulties can arise where the solicitor is required to, in effect "freeze" the transaction pending appropriate consent.
• There is no legal professional privilege defence applying to all solicitors under the Act (as opposed to the Regulated Sector where a limited defence applies).
• Given the wide definition of criminal property, a significant amount of property in the UK is likely to be or potentially be, criminal property and by the time the solicitor is involved, it may look no different from any other property.
• There is no "de minimis" saving in the Act and therefore, a client’s tax evasion or benefit fraud involving £10 will trigger the same duties in the solicitor as a £1 million evasion or fraud. There is a risk that the NCIS will become swamped with disclosures and clients will be less likely to give their solicitors the full facts.

An opportunity to remedy the confusion presented itself to the court in PvP (2003). Solicitors acting for the wife in proceedings for ancillary relief suspected that part of the matrimonial assets had been retained as a result of tax evasion and could therefore fall within the definition of "criminal property" under the Act. By acting, they might thereby become concerned in an arrangement which would facilitate "the acquisition, retention, use or control of criminal property" by the wife, contrary to section 328.

To protect themselves and their client, the solicitors wrote to the NCIS disclosing their suspicions and seeking advice as to whether, given the "tipping off " and "prejudicing the investigation" rules in the Act, they could disclose their letter to the husband’s solicitors.

Having been advised by the NCIS that they were not permitted to inform either their client or the husband’s solicitors, the wife’s solicitors sought the guidance of the court. The issue is a particularly thorny one for family lawyers who are obliged to comply with duties of full and frank disclosure not only to their clients, but also to the lawyers acting for the other party.

Although specifically directed at solicitors acting in family proceedings, the judgment is useful guidance for all legal advisers who may come into possession of personal information relating to their clients/other parties under Parts 7 and 8 of the Act, particularly on the interpretation of the statutory provisions relating to tipping off and prejudicing an investigation.

• There is nothing to prevent a legal adviser from accepting instructions from a client. However, if it then appears to the adviser that there are grounds for suspicion that any arrangement being sought from the court or negotiated is contrary to section 328, an authorised disclosure should be made and the necessary consent sought. The same would appear to apply to sections 327 and 329.
• There is no legal professional privilege exemption which will justify nondisclosure to the NCIS.
• When acting for an "innocent party", it is sensible practice to extend the application for consent to proceed with the transaction to cover counsel and the client (if appropriate).
• Legal advisers should be aware that the Act does not contain a de minimis exception and makes no distinction between degrees of criminal property.

• Sections 333 and 342 provide that a solicitor is free to communicate to his client or his opponent the fact that a disclosure to the NCIS has been made in connection with giving legal advice or actual or contemplated legal proceedings, unless he does so for an improper purpose.
• In addition, although not required by statute, the solicitor must also consider as a matter of good practice whether it is necessary and appropriate to make the disclosure, a much narrower test than that laid out in the Act. This has been supported by the Law Society in its most recent guidance (the wording in the NCIS Guidance is slightly different (see Box 2)). Except in ancillary relief cases, it would rarely be necessary or appropriate to tell another party that an authorised disclosure has been made, so the issue of disclosure will only really arise when it is the client who is suspected of dealing with criminal property.
• The time lines relating to obtaining consent to act (set out in section 335) are independent of the provisions relating to disclosure in sections 333 and 342. Therefore, although the solicitor must not take any action during the initial notice period until consent is obtained or the moratorium period has passed, there is nothing in the statute to stop him from making an immediate disclosure (subject to it being necessary or appropriate) unless it is made for an improper purpose.
• However, as a matter of good practice, the judge concluded that a solicitor should wait for seven days before making a disclosure. Where consent is refused by the NCIS and a 31 day moratorium period is imposed, best practice is to attempt to agree with the NCIS the degree of information that can be disclosed, and to apply to the court in the absence of agreement.
• In cases where the court’s guidance is sought and the suspicions of money laundering relate to the opposing party, applications should be made without notice to that party, making the NCIS the respondent. Applications should be heard in private and the court should direct that mechanical recordings should not be disclosed or transcribed without leave.
• It will not be necessary to make repeated disclosures on the same facts, unless it is proposed to vary an arrangement or enter into a new one.

The NCIS issued revised guidance in October 2003 which, in general terms, follows PvP on good practice when making disclosure to a client/other parties.

The Law Society has issued interim guidance for family solicitors following PvP.* In addition to supporting the clarification on disclosure in PvP to clients or the opposing party, it contains the following useful points:

• If a solicitor suspects that criminal property may be involved in a transaction and does not wish to continue to act, he may withdraw.
• In situations where another party is suspected of money laundering, it is necessary and appropriate for a solicitor in giving legal advice to the client or advising in connection with legal proceedings to advise the client that in the light of their knowledge and suspicion, both they and the client may commit an offence if they continue to act and either an authorised disclosure is not made, or consent is not obtained. If the client does not consent to the disclosure, the solicitor should withdraw.
• If the solicitor wishes to continue to act, he should obtain appropriate consent from the NCIS before proceeding, although seeking clarification from the client or the other side prior to doing so may be acceptable.
• Even if the Act permits the solicitor to do so, there is no absolute duty on solicitors to tell their clients that a disclosure to the NCIS has been or will be made.

PvP is to be welcomed as going some way towards clearing up the confusion with regard to when a solicitor (at least in relation to family proceedings) can inform his client or a third party that a disclosure has been made. However, more is needed on how solicitors should apply the Act in practice as there is currently no guidance for solicitors on how to identify what might potentially be criminal property, and the level of suspicion required before the obligation to make an authorised disclosure is triggered. In addition, neither PvP or the Law Society have explained how the test for determining whether it is "necessary and appropriate" to make a disclosure should be applied in practice.

Practitioners should also bear in mind that this article focuses on only one aspect of their obligations under the money laundering legislation. In particular, the warning signs to watch out for set out in our original article and the "know your client" guidance from the Law Society should always be considered.