Supplementary memorandum by the Law Society
of England and Wales
1. SUMMARY
1.1. The Law Society ("The Society")
is the professional body for solicitors in England and Wales representing
over 115,000 solicitors. The Society represents the interests
of the profession to decision makers within Parliament, Government
and the wider stakeholder community, and has an established public
interest role in law reform.
1.2. The Society is committed to ensuring that
anti-money laundering measures are clear, proportionate, effective
and workable in practice. Through lobbying, the Society is campaigning
for the achievement of a level playing-field across the EU and
the rest of the world, in order to ensure that UK legal practitioners
and businesses are not at a disadvantage in relation to non UK
legal practitioners and businesses.
1.3. The Society thanks the committee for the
opportunity to give oral evidence on 4 March 2009, and welcomes
the opportunity to provide supplementary evidence relating to
the UK's anti-money laundering and counter terrorist financing
regime.
1.4. The committee specifically requested
access to:
— The Society's advice to the profession
on complying with its anti money laundering and counter terrorist
financing obligations; and
— The Society's submission to the Home
Office on the consent regime.
1.5. The Law Society's practice note is
available at: http://www.lawsociety.org.uk/productsandservices/practicenotes/aml.page
1.6. The Law Society's submission to the
Home Office is available at: http://www.lawsociety.org.uk/documents/downloads/dynamic/lsresp_consentregime.pdf
1.7. The committee also asked for the Society's
views on how the anti-money laundering and counter terrorist financing
regime could be improved to address the concerns we had raised
in our initial written evidence and our oral evidence.
1.8. We see that there are two key areas
of improvements which could be made, namely:
— Targeting the AML regime more effectively
so that the regulated sector can focus their preventative activities
on the criminal conduct which is the focus of the Government's
anti-money laundering and counter terrorist financing strategy;
and
— Reducing the cost of client due diligence
compliance on the regulated sector.
1.9. The Society has outlined in more detail
below the specific changes to legislation and actions by government
which we think would achieve these improvements.
1.10. The Society has also noticed with
concern a number of suggestions in evidence before the committee
that the problems with the legislation could be resolved through
memorandums of understanding with law enforcement, prosecutorial
discretion, Executive Government agreements, professional guidance
and the like. We urge the committee to take care with respect
to such suggestions. The rule of law provides that the Executive
Government cannot contract out of the normal and legal consequences
of the legislation which Parliament has enacted. Where there is
a problem with the legislation, it is only legislative intervention
which will rectify the situation.
TARGETING THE
AML REGIME
2. REVIEW
THE FOCUS
OF THE
DEFINITION OF
CRIMINAL PROPERTY
2.1. The Society appreciates that this is
a complex and difficult area of law, where unintended consequences
can easily arise. This is particularly evident in the difficulties
faced by the Home Office in achieving consensus on the way forward
with respect to the consent regime.
2.2. As the Society advised in our oral evidence
there are a number of issues with respect to the definition of
criminal property as it applies in the UK. This is partially due
to a departure from the FATF recommendations and the EU directives
and partially due to the nature of our domestic law.
2.3. The FATF 40 recommendations provide
a number of options for countries to define criminal property,
through the way they define a predicate office.[2]
2.4. FATF encourages countries to apply
their anti money laundering laws to all serious predicate offences.
It defines serious predicate offences as:
(b) a list of crimes with a penalty of at
least one year's imprisonment; or
(c) or a list of crimes which at least covers
the following:
— participation in an organised criminal
group and racketeering;
— terrorism, including terrorist financing;
— trafficking in human beings and migrant
smuggling;
— sexual exploitation, including sexual
exploitation of children;
— illicit trafficking in narcotic drugs
and psychotropic substances;
— illicit arms trafficking;
— illicit trafficking in stolen and other
goods;
— corruption and bribery;
— counterfeiting currency;
— counterfeiting and piracy of products;
— murder, grievous bodily injury;
— kidnapping, illegal restraint and hostage-taking;
— insider trading and market manipulation.
2.5. The UK has adopted the all crimes approach.
As we advised in our oral evidence, this can create a stricter
application of the law in the UK because of the very wide range
of offences in the UK which are treated as criminal. In many parts
of Europe many such offences are dealt with by way of administrative
action and have administrative sanctions. This could mean that
even in other European countries which adopt an all crimes approach,
certain activities which are caught within the UK will not be
caught in those countries.
2.6. Once one understands the definition
of criminal conduct, the legislation goes on to define criminal
property as: "Property which is, or represents, a person's
benefit from criminal conduct, where the alleged offender knows
or suspects that it is such".
2.7. Property is defined as: "All
property whether situated in the UK or abroad, including money,
real and personal property, things in action, intangible property
and an interest in land or a right in relation to any other property".
2.8. These definitions raise a number of
other problems, which we outlined in our oral evidence, including
issues of money laundering on the basis of monies saved, the need
for repeated reports about old offences despite attempts to rectify
past criminality and the need to obtain consent even where there
is absolutely no intent to launder.
2.9. Consequently in practice you may have
criminal property from a wide number of regulatory offences which,
we do not believe, are intended to be within the key focus of
the Government's anti-money laundering and counter terrorist financing
strategy, such as:
— Failure to register as a processor
of personal data with the Information Commissioner;
— Failure to obtain a waste disposal
licence; or
— Failure to obtain a fire and asbestos
report for the sale of commercial premises.
2.10. There may also be anomalous results
such as:
— The need to continually report old
offences, such as the previous failure to pay the minimum wage,
with respect to a business entity, despite efforts to rectify
the criminal activity, because the assets of the business entity
remain tainted by the criminal conduct of a previous owner; or
— The potential need to seek consent
to return criminal property to the victim of the crime.
2.11. The Society notes the Crown Prosecution
Service's evidence before the committee that it would exercise
its discretion not to prosecute in relation to such minor regulatory
matters or in cases where the law is clearly producing such anomalies.
While the Law Society is in favour of prosecutorial discretion
generally, the rule of law requires that law, particularly criminal
law, is made as clear and as certain as it can be. It is not desirable
that solicitors, who are Officers of the Court, are encouraged
to knowingly break the law on the basis that the Executive did
not really intend the law to operate as it does and avoid prosecution
because of the discretion of the prosecutor.
2.12. The Society would like to work with
the Home Office to review ways of re-focusing the definition of
money laundering and the money laundering offences to ensure that
they target the anti-money laundering and counter terrorist financing
regime so that it is more effective in disrupting serious and
organised crime which is at the heart of the Government's strategy
in this area. We appreciate that this will be a detailed process
which will require the involvement of a number of stakeholders.
3. EXPANDING
THE ADEQUATE
CONSIDERATION DEFENCE
3.1. Under section 329 of the Proceeds
of Crime Act 2002, it is a defence for someone to acquire or possess
criminal property if they provided adequate consideration for
the property, unless they know or suspect that the goods or services
they provided may help another to carry out criminal conduct.
3.2. This defence applies where professional
advisors receive money for or on account of costs. The fees charged
must be reasonable and the value of work must equate with the
fees received.
3.3. Unfortunately this defence does not
apply to sections 327 and 328 of the Proceeds of Crime
Act 2002. Where a solicitor enters into a retainer and is receiving
funds for costs which they suspect may be tainted, they will be:
— assisting a person to transfer criminal
property in contravention of section 327 and
— Entering into an arrangement which
enables a person to use their criminal property in contravention
of section 328.
3.4. To ensure that the legislative intention
of the defence of adequate consideration is fully implemented,
the Society would like to see the defence also applied to sections
327 and 328. This defence does not provide an open gate for
criminals to siphon off criminal funds to their professional advisors.
Instead it helps to guarantee the fundamental human right of access
to justice and a fair and just legal system for people suspected,
accused or even convicted of criminal activities.
4. REMOVAL
OF CRIMINAL
SANCTIONS FROM
THE REGULATIONS
4.1. The Money Laundering Regulations 2007 (the
Regulations) do not cover the offences of being involved with
money laundering. They cover:
— setting up systems to enable you
to comply with your obligations; and
4.2 Within the supervisory regime for compliance
with the Regulations, there is the power to discipline, fine,
and remove from practice or remove licences of, those who fail
to comply with the Regulations. This is consistent with the approach
in many other European countries.
4.3 We believe that by going further to
criminalise a breach of the Regulations; the UK is undermining
the proper application of the risk based approach. Instead of
the regulated sector in the UK looking first at their client and
the transaction to assess the risk of money laundering, they tend
instead to look at the risk of going to jail if they get the process
wrong. This has tended to result in over-compliance with the Regulations
in practice.
4.4 Rather than being of benefit to the
fight against money laundering, this over-compliance means that
a considerable amount of time and resources are spent on the process
eg obtaining detailed client identification material in situations
which pose little or no risk of money laundering rather than focusing
resources on the real risks. With finite resources able to be
spent on compliance, particularly in increasingly difficult economic
times, this misapplication of resources because of fear so that
the risk-based approach is not properly applied is detrimental
to the overall fight against money laundering.
4.5 The law enforcement agencies may take
the view that these criminal sanctions exist only for the most
serious of cases. However it is hard to imagine that a person
in the regulated sector whose failings with respect to the regulations
were so bad as to warrant criminal action would not also be able
to be charged with a failure to report offence or even a principal
money laundering offence. This added level of criminal sanction
is neither warranted nor proportionate and is not beneficial to
the effective operation of the Government's anti money laundering
and counter-terrorist financing strategy.
5. REDUCING
THE COST
OF COMPLIANCE
WITH THE
REGULATIONS
5.1. During oral evidence before the committee,
it became apparent that small firms in the regulated sector are
spending thousands of pounds a year to comply with client due
diligence, training and monitoring obligations. Larger firms are
spending millions of pounds, while some of the banks are spending
tens of millions of pounds in compliance.
5.2. Some of our firms have advised us that opening
a new international corporate client matter can cost in the vicinity
of £5,000 due to the lost time of fee earners or compliance
staff in undertaking all of the checks required and the direct
costs associated with obtaining documents or e-information to
verify the information they have received. These costs are not
directly passed on to the client and present a challenge to such
firms as to whether they take on clients who may cost more to
verify than the value of the retainer. Smaller firms are also
concerned about the costs of client take-on.
5.3. The Society is concerned that much
of the client due diligence information required under the Regulations
is difficult, if not impossible, to obtain, costly and the requirements
to obtain such information are not necessarily targeted at the
right point or person to help detect possible money laundering.
5.4. The Society would like to see the UK
government and other governments around the world, work together
to increase the availability of client due diligence information
to the regulated sector in an affordable way.
6. OBTAINING
BENEFICIAL OWNERSHIP
INFORMATION
6.1. Obtaining information on beneficial
owners, particularly in complex structures can be extremely difficult.
There are a number of jurisdictions where secrecy of beneficial
ownership is protected by law or where the only information you
will get is directly from your client.
6.2. The Regulations also require that beneficial
owners are identified wherever they exist, and the risk based
approach only applies to whether you verify them. This means that
even in low risk transactions, you are still required to go through
quite detailed beneficial ownership searches. Where the only information
available is from the client, you are in effect verifying the
information as best as possible, simply by obtaining it. Therefore
the risk based approach, as it currently stands, provides limited
benefit in reducing the compliance burden.
6.3. The Society would like to see the Regulations
amended so that beneficial owners only have to be identified on
a risk based approach. This was one of our recommended amendments
to the Third European Directive on Money Laundering, which was
accepted during the committee stages but was abandoned during
the Council of Ministers negotiations.
6.4. Also, the Society would ideally like
to see all FATF countries prevent entities with obscure beneficial
ownership structures from being established in their jurisdiction.
However, as an interim measure, we think it would be of assistance
if all FATF countries require entities formed within their jurisdiction
to register beneficial ownership information on a register. We
would like to see that information made available to the regulated
sector either free of charge or at a minimal cost.
6.5. The Society would like to see the UK
government take a lead in negotiations with other jurisdictions
to facilitate the creation of such a register.
7. EQUIVALENCE
7.1. The Society outlined in paragraphs
8.2 and 8.3 of its initial written evidence to this
committee how equivalence is meant to reduce the burdens of compliance
and how in practice this is not working.
7.2. The Society is of the view that the equivalence
provisions would be more effective if:
(a) There were an agreed list of equivalent
jurisdictions and regulated markets at an EU or FATF level.
(b) The Money Laundering Regulations 2007 were
amended so that reliance on the government issued list was deemed
to be compliance with the Regulations for the purposes of the
legal question of equivalence.
(c) The Money Laundering Regulations 2007 were
amended to remove the extra requirements with respect to assessing
equivalent markets.
8. POLITICALLY
EXPOSED PERSONS
AND SANCTIONS
8.1. Firms are spending large sums of money
on commercial providers to help them assess whether a client is:
(a) a politically exposed person (PEP), on
whom they have to do enhanced client due diligence; or
(b) On a sanctions lists, therefore requiring
them not to do business with that client.
8.2. The definition of a PEP is very wide.
It includes all persons who within the last year held one of the
following positions with a Community Institution, International
Body or a state (other than the UK):
(a) heads of state, heads of government,
ministers and deputy or assistant ministers;
(b) members of parliament;
(c) members of supreme courts, or constitutional
courts or of other high level judicial bodies whose decisions
are not generally subject to further appeal;
(d) members of courts of auditors or of the
boards of central banks;
(e) ambassadors, charges d'affairs and high-ranking
officers in the armed forces; and
(f) members of the administrative, management
or supervisory bodies of state-owned enterprises.
8.3. The definition also includes immediate
family members of a PEP and their known close associates. For
known close associates, it is sufficient that a regulated person
only have regard to information in their possession or which is
publicly known.
8.4. Where a solicitor is acting for a PEP,
it is a criminal offence not to:
(a) have senior management approval to commence
the business relationship,
(b) take adequate measures to establish source
of wealth and source of funds, and
(c) Conduct enhanced ongoing monitoring of
the transaction.
8.5. In terms of the sanctions list, it
is a criminal offence to deal with financial resources of a person
on the sanctions list. There are currently approximately 7,000 persons
on HM Treasury's consolidated sanctions list. The list is available
in HTML or PDF and runs to some 135 pages the way in which
it is formatted means that it is not possible to search it electronically.
The numbers of clients that firms take on daily makes it time
consuming to search the list manually.
8.6. With so many people covered by the
above definitions and the risks to a firm for dealing with either
a PEP or a person on a sanctions lists being so high, it is understandable
that many are seeking the assistance of commercial providers to
create and search lists for them. However the costs for these
services are high.
8.7. Within the solicitor's profession,
approximately 87% of our member firms are small, with four partners
or less. They do not have a person who can dedicate their full
time to anti-money laundering compliance. Nor can they afford
the £1,000 a year fee that is a general starting rate
for access to these types of commercial providers. However, the
Society is receiving increasing information that PEPs are starting
to target smaller legal firms in the hope that they will go undetected.
8.8. The Society has long argued that governments
are best placed to know who their own PEPs are and it is unfair
to impose a requirement on the private sector to conduct enhanced
due diligence on those people without providing a public list
of who they are.
8.9. The Society would like to see:
(a) EU and FATF country governments provide
free and easily searchable lists of their own PEPs for use by
the regulated sector.
(b) The UK government make its sanctions
list more easily searchable.
9. CONCLUSION
9.1. The Society is happy to provide any
further information to the committee as required.
9.2. We look forward to continuing to work with
the UK government and other relevant bodies to ensure that the
UK has an anti-money laundering and counter terrorist financing
regime which is clear, effective, workable and proportionate and
addresses the real risks.
The Law Society of England and Wales
March 2009
2 A predicate offence is the first criminal offence
(ie theft) through which a person can receive criminal property,
in order to then launder the criminal property. Back
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