Legal and Regulatory Aspects of Financial Crime

1. Legal and Regulatory Aspects of Financial Crime Lecture Four Joanna Gray LL.B., LL.M. (Yale Law School), Solicitor (England and Wales), Professor of Financial Regulation in Newcastle Law School, University of Newcastle upon Tyne, UK.

2. S 333A – the offence of “tipping off” • A person commits an offence if • he discloses the fact that a disclosure has been made (either by him or by another person) to a constable, a Customs and Excise officer, a nominated officer (like a MLRO) or to a staff member at Serious and Organised Crime Agency • AND that disclosure might prejudice (harm) any follow up investigation

3. S 333A – the offence of “tipping off” • AND the information on which the disclosure is based has come to the person in the course of a business within the regulated sector ALSO an offence of “tipping off” if a person discloses that an investigation into allegations that a money laundering offence has been committed or is being carried out AND the disclosure is likely to harm the investigation

4. Defences to the offence of tipping off – i.e. when can bank staff disclose that a report has been made or that an investigation is likely? • Sections 333B-D permit certain intra-group disclosures, disclosures to legal advisers, disclosures within the business or within the group or disclosures to a person’s “supervisory authority” within the Money Laundering Regulations 2007 (see lectures 5-6)

5. Some case law examples of problems caused by “tipping off” offence • A good example of the kind of dilemma that banks can find themselves in when they are worried about “tipping off” their customers and therefore committing an offence under the Proceeds of Crime Act 2002 is provided by the earlier case of • Bank of Scotland v A Ltd & Others ( Court of appeal – on Blackboard)

6. Bank of Scotland v A Ltd & Others • Prior to POCA 2002 – under previous law Section 93A of the Criminal Justice Act 1988 contained one of the basic offences of money laundering as defined in UK law. It criminalized conduct which assisted another to retain the benefits of criminal conduct and exempts the reporting to the police of suspicions or belief of such conduct from any restrictions on disclosure of information otherwise imposed by law.

7. Bank of Scotland v A Ltd & Others • It also imposed a criminal offence on conduct which can amount to the effective “tipping off” of any person of the fact that such disclosure has been made or any other information or matter, which could prejudice an actual or potential police investigation of money-laundering activity.

8. Bank of Scotland v A Ltd & Others • A company referred to throughout the case as A Ltd opened sterling and US dollar accounts with the bank in 1999. As substantial sums began to be transferred to these accounts the bank became suspicious and began to worry about its exposure to legal risk under the civil law of constructive trusteeship in respect of the monies held in these accounts.

9. Bank of Scotland v A Ltd & Others • The bank suspected that the monies could represent the proceeds of fraud and communicated its suspicions to the police. The bank became aware that serious criminal investigations were ongoing into the activities of an individual referred to as “T” who appeared closely associated with A Ltd.

10. The Bank’s dilemma : ...it was worried that this meant it should not pay out any money of A Ltd’s accounts due to the possibility of the monies in that account being the subject of a constructive trust. BUT the bank was warned by the police that if it did NOT pay out on the accounts, and A Ltd brought an action against it, it would not be able to defend such an action as the police warned the bank that disclosure of what it had told them would expose it to criminal liability for tipping-off…

11. So to Court to ask for help – Stage 1   In what it saw as “no win” situation the bank sought directions as to how to proceed from the High Court in an emergency application of which A Ltd was not notified and Mr Justice Lightman ( a different Judge) gave an injunction (a Court Order) which effectively froze A Ltd’s bank accounts but revealed nothing about its origins of the motives for the application.

12. What next? • • An angry customer (A Ltd) was beginning to wonder where its money was..… • The bank wrote to A Ltd in the most general of terms through its solicitors informing A Ltd that no further payments could be made on the account until the bank’s own legal advisers had examined certain aspects of transactions on it.

13. SO…the bank went Back to Court …Stage 2 • By the end of 1999 A Ltd applied to Court for payment out to it of sums held in the account and although the bank attempted at that hearing (before a different Judge again!) to still keep the reasons for the original injunction secret from A Ltd and its representatives.

14. Bank of Scotland v A Ltd & Others • BUT the effect of this application and hearing before Court was to achieve the very objective which the police and investigation authorities, along with the bank, were trying to avoid all along., namely it made A Ltd and its advisors aware of the motive behind the earlier secret application to Court by the bank and they could therefore conclude that serious criminal investigations were underway.

15. Bank of Scotland v A Ltd & Others • • Who should pay for all this legal argument? This led to more Court proceedings…. as to the issue of how costs should be borne as between the bank and A Ltd and directions how best to proceed in future cases such as this. Judge ruled the Judge at Stage 1 of the case had been wrong to grant the original injunction sought by the bank freezing A Ltd’ account.

16. Bank of Scotland v A Ltd & Others • The judge looked for guidance on the application of the tipping-off legislation and expressed his unhappiness with lack of firm and specific police evidence to assist the bank in support of that original application. He stressed that this was NOT the fault of the bank itself as the police had told it that they did not wish any of the information on which its suspicions were based to be laid before the Courts and that they would regard this as tipping-off….but the bank still had to pay its own legal costs

17. The Bank appealed to the Court of Appeal • Court of Appeal judge did acknowledge the extreme nature of the bank’s dilemma along with the exceptional public policy interest lying behind money laundering legislation: • “Money laundering is an increasingly common problem of large-scale crime. It is of the greatest public importance that the police should be supported by financial institutions in their attempts to prevent money laundering and to detect it when it happens. When a financial institution co-operates with the authorities, then the courts should be sympathetic to an application for their assistance, if assistance is really necessary.” • But he also warned the Law Enforcement authorities against misusing the offence of tipping-off against financial institutions and bullying them by threatening them with prosecution for “tipping off”

18. More recent case law where banks have asked the Court for help with a frozen customer account • The position of banks has been clarified by High Court in Squirell Ltd v National Westminster Bank with HM Customs and Excise intervening (April 2005)

19. Squirrell Ltd v Nat West & HMCE • The applicant on this application, Squirrell Limited was formed in 2002 and changed to its current name in January 2003. Since May 2003 it has been involved in the business of buying and selling, among other things, mobile telephones. Its level of business grew very substantially in October 2005. It had a bank account at National Westminster Bank plc ("Natwest"), the respondent.

20. Squirrell Ltd v Nat West & HMCE • On 15 March 2005, Natwest froze Squirrell's account. It did not tell its customer why it had done so. There is very nearly £200,000 in the account. Squirrell tried to discuss this with its relationship manager at the bank but to no effect. On 18 March, Natwest wrote a short letter to the Managing Director of Squirrell, Mr Ike Khan. It declined to unblock the account and provided him with no explanation for its decision.

21. Squirrell Ltd v Nat West & HMCE • Squirrell Ltd applied for an order that the accounts be unfrozen because (1). no notice was given to the Claimant of the Defendants action (2). The claimant has been denied access to the account by the defendant (3). To request an order of disclosure from the Defendants for their actions.

22. Squirrell Ltd v Nat West & HMCE • Natwest argued that it wished to comply with Squirrell's instructions in relation to its account but that it was forced to block it because of the provisions of s. 328(1) of the Proceeds of Crime Act 2002 ("POCA"). Furthermore, because of the anti-tip off provisions of that legislation, it was also prevented from explaining to Squirrell the reasons for so acting.

23. Squirrell Ltd v Nat West & HMCE • However, at the beginning of the application HM Customs and Excise applied to intervene in the proceedings. That application was not resisted. Since that time Squirrell has been aware that Natwest acted in pursuance of its alleged duties under POCA and that those duties arise out of or in relation to certain investigations which HMCE says it is conducting into possible VAT offences. So the application then became mainly concerned with the scope and effect of s 328(1). Mr Khan's primary concern is to have the account unblocked so that the company can continue to make payments from it in the course of and for the purpose of maintaining its business.

24. Squirrell Ltd v Nat West & HMCE • Natwest adopted a neutral position • But HMCE argued that to unblock account would be a direct contravention of the statutory scheme under Part 7 of POCA. HMCE stated that Natwest was correct in its assessment that the legislation required it to block the account.

25. Squirrell Ltd v Nat West & HMCE • Judge considered the legislation and meaning of s 328 POCA and stressed that at this stage no proof that S Ltd had committed an ML offence and indeed may well be entirely innocent – BUT neither Natwest or HMCE should be expected to give cross undertakings in damages for they were merely operating the POCA legislation

26. Squirrell Ltd v Nat West & HMCE – Judge’s words • The combined effect of these provisions is to force a party in Natwest's position to report its suspicions to the relevant authorities and not to move suspect funds or property either for 7 working days or, if a notice of refusal is sent by the relevant authority, for a maximum of 7 working plus 31 calendar days. Furthermore the anti-tip off provisions of s 338 of POCA prohibit the party from making any disclosure which is likely to prejudice any investigation which might be conducted following an authorised disclosure under s 338.

27. Squirrell Ltd v Nat West & HMCEJudge’s words • The way these provisions work can be illustrated by the facts of this case. Once Natwest suspected that Squirrell's account contained the proceeds of crime it was obliged to report that to the relevant authority, in this case HMCE. It was also obliged not to carry out any transaction in relation to that account. That remains the position unless and until consent to the transactions is given by HMCE or, if it is not, the relevant time limits under s 335 have expired. In the meantime it is not allowed to make any disclosure to Squirrell which could affect any inquiries HMCE might make. Obviously, telling Squirrell why it had blocked its account would constitute a prohibited disclosure.

28. Squirrell Ltd v Nat West & HMCEJudge’s words • These provisions could work hardship, as indicated above. But I accept [HMCE’s] submission that it must be assumed that the legislature intended s 328(1) to be of wide scope and for the 7 and 31 day time limits to be sufficient protection of parties in the position of Squirrell. • In my view the course adopted by Natwest was unimpeachable. It did precisely what this legislation intended it to do. In the circumstances there can be no question of me ordering it to operate the account in accordance with Squirrell's instructions. To do so would be to require it to commit a criminal offence. Even if I had power to do that, which I doubt, it could not be a proper exercise of my discretion.

29. Squirrell Ltd v Nat West & HMCE • Sympathy for the position in which Squirrell finds itself do not override those considerations. In addition I cannot accede to Squirrell's application for an order that Natwest disclose the reasons for blocking its account. As a result of HMCE's intervention in this case, Squirrell now knows why its account was blocked. For that reason this relief is no longer necessary. It is not necessary to express any views on the question whether I could have ordered disclosure had Squirrell been kept in the dark.

30. Some Key definitions that help scope the ML offence • “Criminal Property”? – s 340(3) • (3) Property is criminal property if— • (a) it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and (b) the alleged offender knows or suspects that it constitutes or represents such a benefit.

31. Criminal Property? • (5) A person benefits from conduct if he obtains property as a result of or in connection with the conduct. • (6) If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage.

32. Criminal Property • ALL types of property wherever situated • ALL types of interest in and right to property are also within the definition

33. Criminal Conduct? • S 340(2) and (4): Criminal conduct is conduct which is constitutes an offence in any part of the United Kingdom, or would constitute an offence in any part of the United Kingdom if it occurred there. It is immaterial— (a) who carried out the conduct; (b) who benefited from it; • (c) whether the conduct occurred before or after the passing of this Act.

34. Case law on mens rea – obligation to disclose • R v Da Silva (COURT OF APPEAL, CRIMINAL DIVISION) [2006] 4 All ER 900 • “... the essential element in the word 'suspect' and its affiliates.. is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be 'clear' or 'firmly grounded and targeted on specific facts', or based upon 'reasonable grounds'.”

35. Terrorism Act 2000 • Defines "terrorist property" as • “(a) money or other property which is likely to be used for the purposes of terrorism (including any resources of a proscribed organisation), (b) proceeds of the commission of acts of terrorism, and (c) proceeds of acts carried out for the purposes of terrorism.”

36. Terrorism Act 2000 • Offences of fund raising, use or possession and money laundering vis a vis terrorist property • Failure to report offences under this Act too – objective “reasonable cause to suspect” test – belief/suspicion arises in course of trade, profession, business or employment…

37. What can the authorities do? • Confiscation Orders are the key weapon under the Act for stripping away the proceeds of crime. • Part 2 of POCA contains a regime introduced in 2003 for confiscation and restraint orders

38. Confiscation Orders the basic principle • The purpose of confiscation proceedings is to deprive the defendant of the financial benefit that he or she has obtained from criminal conduct. To do this the court must decide whether the defendant, has a criminal lifestyle.

39. Significance of Criminal Lifestyle? • If it decides that he or she does have a criminal lifestyle then Court calculates the benefit from general criminal conduct using the assumptions set out in the Proceeds of Crime Act 2002 (POCA). If it decides that he or she does not have a criminal lifestyle, the Court will instead calculate the benefit from particular criminal conduct (the actual offences of which the defendant is convicted).

40. Note alternative to confiscation • Recovery of cash may be made summarily by way of forfeiture • S298 – Forfeiture Orders can be made in respect of summarily seized cash – defendant loses title immediately

41. What is a criminal lifestyle? • only has a criminal lifestyle ( section 75 ) if the offence satisfies one or more of these tests: • (1) it is specified in schedule 2; • (2) it constitutes conduct forming part of a course of criminal activity; and/or • (3) it is an offence committed over a period of at least six months and the defendant has benefited from the conduct which constitutes the offence .

42. What is a criminal lifestyle? • Schedule 2 specifies the following offences: • drug trafficking; money laundering offence; directing terrorism; people trafficking; arms trafficking; counterfeiting; intellectual property; pimps and brothels; blackmail; an offence of attempting, conspiring, inciting, aiding, abetting, counselling or procuring any of these offences

43. What is a course of criminal activity? • (see section 75(3) ) when the defendant: has been convicted in the current proceedings of four or more offences on the same occasion, each of those offences having been committed after 23 March 2003 and from which he or she has benefited; OR has been convicted of one offence committed after 23 March 2003 from which he or she has benefited on this occasion and within six years of the start of the most recent proceedings been convicted on at least two separate occasions of an offence, which may have been committed before or after 23 March 2003 and from which he or she has benefited.

44. Assumptions that can be made about those found to have a criminal lifetsyle • If the court finds that the defendant has a criminal lifestyle, then unless there is a serious risk of injustice, section 10 POCA requires the court to make certain assumptions all of which operate to help maximise the amount of the confiscation order

45. What about third parties in confiscation proceedings? Third parties have no standing in the confiscation proceedings until the enforcement stage. The Court determines the recoverable amount based upon it's finding as to the value of the defendant's property. This may include a proportion of property owned jointly with others, in which case any finding by the Court as to the defendant's interest in that property is not binding on third parties, as they will not have been a party to the proceedings. If the third parties wish to contest the extent of their interest, then they must raise this in the enforcement proceedings

46. Case law on Confiscation Orders? • R v Glatt [2006] EWCA Crim 605, • A solicitor who had acted for a convicted smuggler received seven years in prison and 3.6 million £ confiscation order following his conviction for money laundering. • Judge described Glatt’s actions as “as bad a case as money laundering as one could expect to see – abuse of profession...”

47. R v Glatt • 'There can be no doubt that Louis Glatt has received very significant sums emanating from Martin's criminal enterprises and has been directly instrumental in the conversion of such monies into the acquisition of various properties and other assets purchased in the names of off-shore companies for the ultimate benefit of Martin. Glatt was an expert in the field of off-shore companies and was responsible for the acquisition of those companies used for Martin's benefit. At all material times he was the sole liaison with the relevant management companies who acted on his instructions alone.'