Practice Note: Money laundering obligations – a real headache for advisers

What is money laundering?

Money laundering takes a number of forms, but is essentially an activity whereby the launderer, knowing that he is dealing with property derived from criminal activities, nonetheless conceals its origin or assists others to do so.

The legislation

On 26 October 2005, the EU’s Third Money Laundering Directive (2005/60/EC) was adopted. At the same time, the Second Money Laundering Directive (91/308/EEC) was repealed. Member states were required to give effect to the Third Directive by 15 December 2007. As a consequence, the Money Laundering Regulations 2007 (SI 2007/2157) came into force on that date.

The definition of ‘money laundering’ for the purposes of the 2007 Regulations is imported directly from the Proceeds of Crime Act 2002 (“POCA”). For this purpose, money laundering under POCA covers the following activities.

Concealing, disguising, converting, transferring or removing criminal property;
Being concerned in an arrangement which a person knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person;
Acquiring, using or having possession of criminal property.

In each of the three offences discussed above, a person will be protected from committing an offence if he makes an ‘authorised disclosure’ under POCA. An authorised disclosure does not breach any duty of client confidentiality. The prescribed form and manner of an authorised disclosure is one which is specified in an Order by the Secretary of State (POCA 2002, s. 339). The Serious Organised Crime Agency, now the National Crime Agency (“NCA”) has produced preferred disclosure forms which can be down-loaded from its website at www.soca.gov.uk/about-soca/the-uk-financial-intelligence-unit/completing-a-suspicious-activity-report-sar/474.

Tax advisers

As a person operating in the regulated sector, as defined in the above legislation, a tax adviser will commit an offence if:

He has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering;
The information on which his suspicion is based came to him in the course of his business in the regulated sector;
It is reasonable to believe that the information he has may assist in identifying either the person suspected of money laundering or the whereabouts of the laundered property;
He fails to disclose that information as soon as practical to the ‘nominated officer’ of his firm.

A defence is, however, available where the tax adviser:

Has a reasonable excuse;
Is a professional legal adviser or, with effect from 21 February 2006, a ‘relevant professional adviser’, and the information came to him in privileged circumstances;
Is employed by, or is in partnership with, a professional legal adviser or a relevant professional adviser to provide assistance and support, the information came to the adviser in privileged circumstances and came to the employee or partner in the course of that assistance or support.

A ‘relevant professional adviser’ is an accountant, auditor or tax adviser who is a member of a professional body which grants membership only after a test of competence and which imposes professional and ethical standards on its members, backed up by disciplinary procedures.

‘Privileged circumstances’ mean disclosure was made:-

To a client or a client’s representative in connection with the giving of legal advice; or
To any other person in connection with proposed or actual legal proceedings;
Provided the disclosure was not made with the intention of furthering a criminal purpose.

The role of the Nominated Officer

The nominated officer is someone within an organisation who is nominated to receive authorised disclosures from employees of that organisation. He or she may give ‘appropriate consent’ to an employee to continue with a proposed course of action which would otherwise be a money laundering offence, but only if he, in turn, has made a disclosure to NCA and one of three conditions are satisfied:-

(1) NCA have given ‘appropriate consent’; or

(2) NCA have not responded within the seven day notice period to the effect that consent is refused; or

(3) NCA have responded within the seven-day notice period that consent is refused and the 31-day moratorium period has expired.

The Nominated Officer will commit an offence if:

He actually knows, or suspects, or he has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering;
That knowledge or suspicion is based on a disclosure made to him by an employee of the organisation;
He can identify or it is reasonable to believe that the information he has may assist in identifying either the person suspected of money laundering or the whereabouts of the laundered property and
he does not make a disclosure to NCA in the correct form, as soon as is practicable after the disclosure was made to him.

However, no offence will be committed if the nominated officer has a‘ reasonable excuse’ for not making the disclosure to NCA.

‘Tipping off’

A tax adviser or nominated officer will commit an offence if he makes a disclosure to NCA and then informs the client that he has done so.

‘Due diligence and ongoing monitoring’

As a relevant person a tax adviser is obliged to apply ‘due diligence’ measures when he:

Establishes a business or professional relationship with a customer which is expected by the relevant person, at the time it begins, to have an element of duration;
Carries out an occasional transaction amounting to €15,000 or more, either in a single operation or a number of linked operations;
Suspects money laundering or terrorist financing;
Doubts the veracity or adequacy of previous evidence of identification.

These measures have to be applied before the establishment of a business relationship or the carrying out of an occasional transaction. A ‘risk sensitive’ basis is applied and there is no guidance is given in the regulations as to the meaning of this term. It follows that the extent to which due diligence is carried out and the evidence to be required is not prescribed; it is up to the relevant person to decide the level of risk involved and to seek evidence which is proportionate to that risk. Simply asking for a passport and utility bill may not be enough.

Where a client or prospective client is not an individual, the due diligence measures require the identification of the ‘beneficial owner’ of that client. The beneficial owner is:

In the case of an unquoted company or limited liability partnership, any individual who controls, directly or indirectly, more than 25 per cent of the shares or voting power or who exercises control over the management of that body;
In the case of a company whose shares are listed on a regulated market, any individual who exercises control over the management of that company;
In the case of a partnership, any individual who is entitled to more than 25 per cent of the profits, who controls more than 25 per cent of the capital of the partnership or who exercises control over the management of the partnership;
In the case of a trust in which all the trust capital is subject to vested interests either in possession, in remainder or in reversion any individual who is entitled to such an interest in at least 25 per cent of the trust capital;
In the case of a discretionary trust, the class of potential beneficiaries;
In the case of all trusts, any individual who has control over the trust including any individual who has the power to dismiss or appoint the trustees, add or remove beneficiaries, deal with trust property or to have ultimate control over the power of other individuals to do so;
In the case of the estate of a deceased individual which is in the course of administration, the executor or administrator of the estate;
In any other case, the individual who ultimately owns or controls the client or on whose behalf the transaction is being carried out.

Apart from the due diligence measures to be applied at the beginning of a business relationship, a tax adviser is also required to conduct ‘ongoing monitoring’ throughout the relationship. This requirement means scrutinising transactions and identifying the source of funds for those transactions, to ensure that the transactions are not inconsistent with the relevant person’s knowledge of the client, his business or his risk profile. In addition, the information held to back up the due diligence measures has to be kept up to date. As with the due diligence measures which are to be applied just before the establishment of a business relationship, ongoing monitoring is to be applied on a risk-sensitive basis.

Registration

A feature introduced by the Third Money Laundering Directive is the requirement for member states to ensure that all ‘relevant persons’ are to be effectively monitored by ‘competent authorities’. Those authorities must have adequate powers to be able to take the necessary measures with a view to ensuring compliance with the requirements of the Directive by those relevant persons. As far as tax advisers are concerned, there are two systems of supervision. Certain professional bodies have been granted the right to supervise their members and those members may apply to be registered under such a scheme. Those who are not members of such a body are obliged to register under a statutory supervisory scheme operated by HMRC. A failure to register under that scheme is an offence which could carry a prison term of up to two years.

Practical advice – transactions

The money laundering legislation imposes a serious burden on the tax adviser in the regulated sector and gives rise to a number of sensitive and difficult issues.

If a tax adviser is invited to advise and/or assist in a transaction and he becomes aware, or suspects, that criminal property is involved then his choice are:

1) To refuse to act right at the start, although he should take care not convey the reason for these suspicions to the client in case ‘tipping off’ becomes an issue;

2) To continue and make an authorised disclosure, either to the nominated officer of his firm or, if none exists, directly to NCA.

The adviser then waits seven days for a response from NCA. If that body gives approval or fails to respond within the seven days, he may continue to act in relation to the arrangement, but should not disclose to any party the fact that an authorised disclosure has been made to avoid ‘tipping off.’

Where NCA respond within seven days to the effect that consent to act is refused, the adviser must refrain from acting for a further 31 days. After the expiry of that period he is then free to resume acting, but again, should not reveal that an authorised disclosure has been made.

This delay of up to 38 days may prove to be a practical difficulty where the client is trying to push through a transaction. The agent is not permitted to act but cannot tell the client the reason why for fear of ‘tipping off’. To alleviate this difficulty, a ‘fast-track’ system has been introduced – the disclosure form should be faxed to 020 7238 8286 with a note requesting fast-track treatment and explaining the reason for the urgency.

Practical advice – non-transactional work

In the area of tax compliance, a tax adviser must of course not knowingly assist in the completion and submission of an incorrect return. However if it comes to light that the client has, for example, intentionally withheld details of income, or the adviser has reasonable grounds for suspecting that has happened, then an authorised disclosure must be made to NCA, either directly or via the nominated officer.

An adviser in the regulated sector who is seen by a client who wishes to take legal advice about a disclosure may have a defence if the matter came to him in ‘privileged circumstances’ but advice should be taken in each case to ensure that there is no infringement of the legislation.

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells