What is relevant in battle against crime?

Peter Camp examines the implications for solicitors of the regulations requiring them to report any suspicions of money laundering


In February 2003, the Proceeds of Crime Act 2002 Act (POCA) came into force, changing the way in which solicitors were required to report their suspicions of money laundering activities. In March 2004, the Money Laundering Regulations 2003 came into force extending the definition of the 'regulated sector' and thereby imposing on solicitors further reporting obligations.


The regulations extend their scope to 'relevant business', which is defined in the same way as the term 'regulated sector' referred to in POCA. For solicitors, the most common activities that will fall within the definition of 'relevant business' are:

Regulated activities as defined in the Financial Services and Markets Act 2000 (FSMA). Remember solicitors do not have to be authorised by the Financial Services Authority to fall within this category. Most solicitors avoid the need for authorisation under FSMA by undertaking 'exempt regulated activities' - these activities still fall within the scope of the money laundering regulations.

Estate agency work.

The provision by way of business of advice about the tax affairs of another person.

The provision by way of business of legal services that involves the participation in a financial or real property transaction.

The provision by way of business of services in relation to the formation, operation or management of a company or trust.

There will be activities undertaken by solicitors outside the definition of 'relevant business'. Examples include participation in litigation, publicly funded work, will drafting (unless inheritance tax planning advice is given) and legal advice (unless it is tax advice or a regulated activity). However, the Law Society has advised that since the scope of the regulations is as yet untested by the courts it would be wise for solicitors to comply with the regulations on a broad, rather than narrow basis as a form of risk management. The Society also advises that it might be appropriate to apply the regulations across all of a solicitor's activities to protect against committing an offence under POCA.


Where applicable, the regulations require solicitors to establish procedures relating to identification of clients, record keeping, the appointment of a nominated officer and internal reporting procedures, and internal control and staff training.


Part 7 of POCA contains a number of money laundering and related offences. Most could apply to solicitors and, in extreme cases, conviction could lead to imprisonment for a maximum period of 14 years. Two of the offences are of particular relevance to solicitors.


Section 328 of POCA provides: 'A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.'


Solicitors are likely to be facilitating the acquisition, retention, use or control of criminal property where criminal funds are placed in client account or used in the acquisition of real property or other assets. Furthermore, it is not necessary for the solicitor to be in possession of criminal property &150; merely advising a client where such advice assists in the acquisition, retention, use or control will be sufficient.


Criminal property is defined as constituting a person's benefit from criminal conduct or representing such a benefit (whether directly or indirectly). Criminal conduct in this context means any UK criminal offence or any overseas activity, which if it occurred in the UK would be a UK criminal offence. Thus stolen money will be criminal property. If the money is used to acquire an asset, that asset will be criminal property.


If the asset is used as security for a loan, the funds representing the loan will be criminal property. It is the criminal's attempt to confuse the audit trail that amounts to the true activity of money laundering.


The section requires a double test of knowledge or suspicion. To be guilty, a solicitor must know or suspect that the arrangement will facilitate the acquisition, retention, use or control of criminal property and must know or suspect that the property concerned is criminal.


Where a solicitor knows or suspects that a client's instructions involve criminal property, the solicitor may decline to act. In this case, the solicitor will not be involved in any arrangement prohibited by section 328 of POCA.


No action will need to be taken by the solicitor unless the instructions were received in the course of business in the 'regulated sector'. If, however, despite the solicitor's knowledge or suspicion, the instructions are accepted and the transaction proceeds, the solicitor is at risk of committing an offence under section 328 of POCA. To avoid committing an offence, an authorised disclosure should be made either to the firm's nominated officer, or to the National Criminal Intelligence Service (NCIS). If an authorised disclosure is made, the prohibited act (that is, the arrangement) cannot proceed without the consent of NCIS.


Under section 330 of POCA, an offence is committed if a person knows or suspects or has reasonable grounds for knowing or suspecting that another is engaged in money laundering. And that the information came to him in the course of business in the regulated sector and no required disclosure of the information is made.


This offence differs from the section 328 offence to the extent that it does not require a solicitor to be involved in any arrangement that might assist the criminal. The offence imposes a duty to report knowledge or suspicion (or reasonable grounds for knowledge or suspicion) of money laundering to NCIS or to the firm's nominated officer where the information arose in the course of business in the regulated sector.


A person engages in money laundering where an act constituting an offence under sections 327, 328 or 329 of POCA is committed. Section 327 creates an offence of concealing criminal property; section 329 creates an offence of acquisition, use or possession of criminal property. The distinguishing feature of sections 327 and 329 (when compared to the offence of 'arrangements' under section 328) is that these offences can be committed by the perpetrator of the original crime. A thief who steals money is guilty of theft. He is also 'engaged in money laundering' when he acquires, uses or has possession of that money (section 329 of POCA).


Consequently if a solicitor, in the course of business in the regulated sector, knows or suspects that a person has committed a crime involving criminal property, an obligation to report arises.


Unlike section 328, the offence of failure to disclose is subject to a privilege defence. If the information came to the solicitor in privileged circumstances, failure to report will not give rise to a criminal offence. However, it must be noted that POCA makes it clear that the privilege defence does not apply where information is communicated to the solicitor with the intention of furthering a criminal purpose.


To protect themselves, solicitors must ensure that they recognise those areas of their practices that give rise to 'relevant business'. Where relevant business is undertaken, they must apply the procedures as required by the regulations. They should consider extending these procedures to other parts of their practice.


Solicitor Peter Camp is the principal at the training consultancy, Educational and Professional Services. He is the author of Solicitors and Money Laundering: A Compliance Handbook, published in September by Law Society Publishing. The book can be ordered direct from Marston Book Services, tel: 01235 465 656