Money laundering: hidden risks for business
July 2018 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
July 2018 Issue
For most, the phrase ‘money laundering’ brings to mind drug traffickers or other hardened criminals, nefariously cleansing ill-gotten gains to hide its criminal nature and allow the funds to be used in the regular financial system.
That, of course, is the activity that lies at the heart of money laundering, and what legislation, both in the UK and internationally, seeks to prevent. However, as is less well appreciated, the ambit, and draconian nature, of that legislation often gives rise to real risks in the course of everyday business.
What happens if a contract that was entirely legitimate becomes tainted by corruption, and the funds that are due under the contract are still to be paid? What happens if a company discovers that rogue executives have been overcharging customers and the business wants to return the improperly taken funds? What happens if a personal assistant is caught stealing from an employer and wants to give the money back?
Each of these scenarios could happen in normal business and life, but would not probably be thought by many as giving rise to a money laundering risk, particularly where the party concerned has in no way participated in any of the underlying wrongdoing.
However, each scenario carries a legal risk. This article looks at how the risk arises and how it can be addressed.
The principal money laundering offences
The UK legislation that targets the cleansing of criminal property is the Proceeds of Crime Act 2002 (POCA). POCA deploys three very widely drafted offences (sections 327-329), that collectively prevent any and all forms of dealing with the proceeds of crime, with what are referred to as the principal money laundering offences.
These provide that the following acts constitute money laundering: (i) concealing, disguising, converting, transferring or removing criminal property from England and Wales, or from Scotland, or from Northern Ireland; (ii) entering into, or becoming concerned in an arrangement which is known or suspected to facilitate the acquisition, retention, use or control of criminal property by or on behalf of another person; and (iii) acquiring, using or possessing criminal property.
In seeking to prevent, and criminalise, money laundering, the principal offences apply a very broad definition as to what will constitute ‘criminal property’, which includes any property of whatever nature that derives from any criminal activity occurring not just in the UK, but anywhere in the world.
Reflecting the focus on preventing the secondary dealing with criminal property, anyone dealing with such property, knowing or having reasonable suspicion that the property represents the proceeds of crime, risks a maximum penalty of up to 14 years’ imprisonment. In many circumstances that will be substantially longer than the maximum penalty for the underlying crime. If the money laundering offence has been committed by executives within a company that have sufficient seniority to represent the controlling mind of that company, the company can itself also be prosecuted, and face an unlimited fine.
The scope of the principal money laundering offences can present very real risks to individuals and companies alike, in circumstances where they would not ordinarily perceive themselves to be acting in a way that could be considered criminal.
So, in the first scenario referred to above, let us assume that an engineering contract won through an open tender process is proceeding in accordance with the contract awarded. Mid-contract, the engineer responsible for authorising contractual payments prevails on two rogue executives to give him corrupt payments if he is to continue making the payments that are properly due. The corrupt payments are made and only later discovered by the board, which had no involvement with, or knowledge of, the corrupt arrangement. Money due under the contract is still owed to the company.
The company may have dismissed the executives, referred their conduct to the police and done all possible to ensure that it was simply an isolated incident that could not reasonably be expected to happen again. Despite all those efforts, and no wrongdoing by anyone other than the rogue employees, the funds that are owed, and properly due under the contract for work legitimately done, have become tainted by the corruption. By allowing the company to receive the money that it is otherwise fully entitled to, the board, and potentially the company itself, knowing of the corrupt payments, risk committing a money laundering offence and possible conviction and imprisonment. The financial position of the business could also be placed in jeopardy.
The company, though, will have done nothing wrong other than accept the sums to which it was contractually entitled.
In the second example, it would seem counterintuitive for the company, having learnt of the overcharging of its customers, to not be able to return the value of the overcharging to the customers concerned without itself facing risk. However, the funds obtained fraudulently again represent criminal property for the purposes of POCA. Despite only wanting to do what is right in returning the money, the company or the individuals concerned risk committing a money laundering offence if they simply return what has become criminal property.
Likewise, the money stolen by the PA is criminal property and care should be taken before it is simply allowed to be given back.
Avoiding the risks
POCA contains a specific provision which, if used correctly, can provide parties with a defence to a technical contravention of a money laundering offence when dealing with criminal property in circumstances where, as with the examples given above, there is otherwise no criminality involved.
That defence is obtained through the making of an authorised disclosure in the form of a suspicious activity report (SAR) to the National Crime Agency (NCA).
Although historically, following the submission a SAR could be obtained for dealing with criminal property, the NCA will now not give consent but will indicate that a defence will be available to what would otherwise be a money laundering offence. In practical terms, the confirmation that a defence is available will, however, mean that the party to whom the defence has been confirmed will not later be prosecuted.
A defence will not, though, be given retrospectively, and so critically a SAR must be submitted, and the defence confirmed, before any proposed dealing with criminal property is undertaken.
The SAR will need to set out clearly and carefully what the criminal property is, why it is believed to be criminal property, details of all persons potentially involved in the relevant criminal conduct, and the precise actions to be taken in dealing with the criminal property for which the defence is requested.
The NCA is not normally sympathetic if it considers that insufficient detail has been provided, preferring to decline a defence and requiring the reporting party to submit an amended SAR.
As shown by the examples above, the wide net of the POCA money laundering regime can create unintended but significant risks to law-abiding individuals and companies.
When being asked to deal with any property that could conceivably have been generated by criminal activity, great care needs to be taken, and specialist advice obtained as necessary. As with the company refunding the money improperly overcharged, even where one is acting with the best of intentions, the risk of inadvertently committing a money laundering offence should not be overlooked.
Jeremy Summers is a partner at Osborne Clarke LLP. He can be contacted on +44 (0)20 7105 7394 or by email: firstname.lastname@example.org.
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