News and Views
Proceeds of Crime Act 2002 and Money Laundering Regulations 2003 – Effective 1 March 2004

WHAT IT MEANS FOR OUR CLIENTS

Please note the following is this firm’s views and interpretation of the legislation and the guidance given should not be relied upon in any specific circumstances. If you wish to discuss any particular situation please contact Mr. John Ingram-Johnson.

In the UK the Money Laundering Regulations 2003 [“the Regulations”] come into force on 1 March 2004. These apply to all professional firms within the UK who normally deal with clients’ financial affairs including Accountants, Solicitors (but see legal privilege below), Financial Advisors, Surveyors and Estate Agents. It should be noted that similar legislation has applied to Banks and Financial Institutions for several years and under this Firm’s FSA registration 183395 we have already had to comply with these earlier regulations since 1996.

The Proceeds of Crime Act 2002 [“POCA”] and the Regulations will mean that this Firm will now be obliged to make a report to the National Criminal Intelligence Service [“NCIS”] if it has a reasonable suspicion that money laundering has taken place and comes across it in a professional capacity. The Firm would be committing a criminal offence if it does not make a report when it has grounds for doing so.

Money laundering is the handling of the proceeds of a criminal activity. It is expressed as any act involving the movement or holding of money or other assets if the source of those funds or assets is of a criminal nature. Put another way, if the Firm has a suspicion that a transaction has taken place involving resources that have come about through criminal activity then it must make a report to NCIS.

There needs to be REASONABLE SUSPICION that the source of funds for any transaction are as a result of criminal activity before a report can be made. This means the Firm cannot simply assume or speculate that a transaction is reportable; it must have real suspicion. If the Firm can document why it made the decision not to report and this is reasonable then it does not need to report. In terms of internal structure the Firm is required to have a money laundering reporting officer [“MLRO”] who collates all potential reports from employees and assesses them before making a report to NCIS. He is fully trained in this area. It cannot be stressed too much that the Firm will not be reporting clients unless there are clear grounds for doing so.

It is essential for you to understand the term TIPPING OFF. This is a separate offence under the Regulations and means that under no circumstances can the Firm give its client any indication that a report has been made to NCIS. In actual fact the Firm is required to stop all work on the client’s affairs until it receives clearance from NCIS that it can proceed. This is normally given within seven days but can be given within 24 hours.

Solicitors continue to retain Legal Privilege. This means that solicitors do not need to report to NCIS if they are acting for a client in respect of a legal matter. However, this does not cover situations where the solicitor is advising on financial or property transactions such as a house purchase. The right to legal privilege gives rise to the interesting scenario that if a client comes direct to us this Firm is obliged to report to NCIS on any suspicious matter but if that client goes to a solicitor who then instructs this firm to act for the client on that matter no report needs to be made to NCIS.

It should be noted that there is no de minimis under POCA and, therefore, there is an obligation to make a report to NCIS no matter what the monetary value involved. This means that the definition of criminal activity is spread very wide and will include all manner of very minor crimes such as not declaring gross interest on your tax return or claiming expenses that are not strictly of a business nature.

As a further obligation under the Regulations the Firm is required to retain sufficient information on its files to be able to confirm that each one of our clients are who they say they are. These requirements are now part of the Firm’s standard due diligence procedures and normally involve obtaining copies of documents containing photographs and home addresses to prove a client’s identity and copies of utility bills to further prove a client’s address. In certain circumstances these documents may require certification by an appropriate party where the firm does not have direct access to the original documents.

As well as having a MLRO it is also a legal requirement that all of the Firm's staff are fully trained in this area. In particular this includes recognising suspicious transactions and making a report of these with the relevant information to the MLRO.

Our engagement letters now contain separate reference to these Regulations and PCOA.

EXAMPLES OF WHERE WE MAY OR MAY NOT MAKE A REPORT TO NCIS

We become aware that a client received £100,000 during the year when we are preparing her tax return. When we query this she tells us that it was received from an Aunt who died and is able to put us into contact with the solicitors who dealt with the estate to evidence this. We would not make a report to NCIS in these circumstances. However, if she was not able to produce any evidence to back up this contention and we were not separately aware that there is a family member who had died we would need to consider making a report to NCIS

We know that a client has a bank account where the interest is received gross. The interest is normally £10 per annum. He tells us that no interest is received on the account for the year and therefore no entry is made on his tax return. We know that the account has not been closed. This puts us in a difficult position as we have a reasonable suspicion that tax has been avoided (a criminal offence) as a result of the interest not being declared. We will obviously make every effort to persuade the client to disclose the interest without breaching the tipping off rules. Note that we are prevented by the rules from saying we will report him to NCIS if he doesn’t let us have the bank interest details. If interest details were not forthcoming we would have no choice but to make a report. NCIS have indicated that the report will be passed to the Inland Revenue and there is a possibility that this may lead to a tax investigation into the client’s affairs.

During a meeting with a client he tells us that he does jobs at the weekend for cash. If we were not able to persuade him that this should be declared then we would be obliged to make a report to NCIS. We will not be able to mention this to the client under the tipping off rules. It is highly likely that an Inland Revenue investigation would result.

A new client comes into us and asks us to bring her tax affairs up to date. She has not submitted tax returns for several years. A crime may have been committed under the Taxes Acts if tax has been underpaid, although the client has now admitted to this and is willing to pay the appropriate taxes on any previously undeclared taxable income. We will be obliged to make a report to NCIS who will no doubt pass these details on to the Inland Revenue. If NICS give us permission to proceed we will also then contact the Inland Revenue to negotiate a settlement in the customary fashion. There is unlikely to be any effect on the normal agreements that we would reach with the Inland Revenue in this situation unless the report to NCIS caused the Revenue to look into the clients affairs before we had a chance to notify them directly. In this case it seems possible that the lighter penalties that normally apply to unprompted disclosure of unpaid taxes would be lost.

Unbeknown to us one of our clients, a reputable local businessman, is purchasing an investment property and pays the deposit of £50,000 by transfer from an offshore account. When questioned by the solicitor dealing with the legal aspects of the transaction about the source of the funds he glibly tells her that the offshore account was set up years ago ‘to avoid tax’. The solicitor accepts the cash and makes a standard report to that firm’s MLRO. The MLRO then makes a report to NCIS. NCIS faxes back its permission for the solicitor to proceed with the transaction. NCIS in due course forwards this report to both the local fraud squad and the Inland Revenue. Investigations are made that show that the offshore account contains £200,000. The fraud squad takes no action as discrete enquiries indicate that there are no criminal connections to our client. The Inland Revenue launches an investigation into our client’s affairs as they have no record of the offshore account. Undeclared business takings are established of several hundred thousand pounds and a settlement of unpaid tax and penalties is reached of £200,000. The client has no idea who ‘grassed him up’ but suspects a disgruntled former business partner.

One of our clients has a business for which the takings are predominantly in cash. When preparing the accounts we notice that the gross margins do not appear to be satisfactory. It appears that cash has been taken from the till but no record exists of this. We would obviously discuss this with the client in an attempt to find an explanation and there may be an innocent reason for the atypical margins. However, if no good reason is put forward and there is still a reasonable suspicion we will be obliged to make a report to NCIS. NCIS is likely to pass the report on to the Inland Revenue and a tax investigation would be likely. It could be that after voicing our concerns the owner investigates and it transpires that an employee has been taking cash from the till. We would still then be required to make a report to NCIS. They would then pass this report on to the police.