By Shaul Brazil & Tom McNeill, BCL Solicitors
BCL Solicitors' Shaul Brazil and Tom McNeill explore the problematic nature of recent “innovations” from UK law enforcement, most notably regarding the misuse of the disclosure and consent regime.
Under the money laundering provisions of the Proceeds of Crime Act 2002 (POCA), banks and other regulated bodies are required to disclose suspected money laundering to law enforcement. The low bar of suspicion, however, means that many disclosures are insubstantial and precautionary; and law enforcement has only limited time – and must satisfy relatively high standards – if it is to obtain a court order preventing the assets in question from being dealt with. Law enforcement’s response has on occasion been “innovative”, with some investigators now encouraging banks to end customer relationships by reducing account balances to a cheque or banker’s draft, which may be seized and ultimately forfeited pursuant to cash seizure powers. Such action enables the circumvention of the higher standards required to obtain court-sanctioned freezing or restraint orders. That this is a potential abuse of the court’s process appears not to have occurred to the investigators, nor to the magistrates when approving the continued detention of the “cash”. The banks may also be complicit in the process, eschewing their obligations to customers so as to curry favour with law enforcement.
The Money Laundering Regime
For a person to commit a money laundering offence, it is always necessary for him or her to, firstly, deal with the proceeds of crime; and secondly, to do so while knowing or suspecting that he or she is dealing with the proceeds of crime (or, for those in the regulated sector, if there are reasonable grounds to know or suspect). It is the distance between these elements – and in particular the low bar of suspicion – that is problematic.
Money laundering often involves concealment of the proceeds of complex financial crime. Investigations can take years before a decision is made whether to charge a suspect. If the funds in question prove not to derive from criminal conduct, no money laundering offence is committed. Yet suspicion is a low bar indeed. In R v Da Silva , the Court of Appeal approved jury directions to the effect that it is sufficient for the defendant to think that there is a possibility, which is more than fanciful, that the property is the proceeds of criminal conduct. In the context of banking relationships, any number of factors might give rise to “suspicions”, including unusual or unexplained transactions or activity on the account and any enquiry by the police, whether reasonable or not, and whether directly into the customer or merely in respect a person with whom they have dealt.
Whether these factors are, in reality, sufficient to give rise to a suspicion to the criminal standard is not something banks wish to test. The principal money laundering offences are punishable by 14 years in prison and an unlimited fine; the failure to report offences (applicable only to the regulated sector) are punishable by five years in prison and an unlimited fine. Understandably, therefore, banks and their employees adopt a cautious approach; invariably, when banks become aware of facts that conceivably could give rise to a suspicion, they will make a disclosure and will frequently look to exit the relationship as quickly as possible. In short, whether or not the customer has done anything wrong, on the basis of sometimes vague suspicions they might find their banking relationship inexplicably ended (tipping-off provisions will typically result in the bank not providing reasons).
The Disclosure Regime
Those in the regulated sector who know of or suspect money laundering by their customers, or have reasonable grounds to know or suspect, are required to make a disclosure to the National Crime Agency (NCA). Failure to make such a “required disclosure” when the appropriate conditions are met is an offence. In addition, the only certain defence to the principal money laundering offences (which apply to everyone and not just the regulated sector) is to make a disclosure to the NCA and, where applicable, seek consent to carry out a “prohibited act”. Accordingly, when suspicious banks wish to end a customer relationship, they will often make an “authorised disclosure” seeking consent from the NCA to return funds to the person suspected of dealing with the proceeds of crime.
Following an authorised disclosure, the NCA will have seven working days in which to give or refuse consent. Should the NCA not respond, consent will be deemed as given. If consent is refused, there is a further “moratorium period” of 31 calendar days after which the assets in question may be dealt with, unless in the meantime a court order has been obtained. The potential complexity of the underlying facts, and the high volumes of disclosures made, make these timescales short indeed: approximately six weeks to investigate and make a decision.
Law enforcement effectively has two options: grant consent; or refuse consent and investigate further in order to apply for a court order (generally, a restraint order in the context of criminal investigations, although a property freezing order may be obtained in the context of civil recovery investigations). Home Office guidance, drawn up in consultation with the Serious Organised Crime Agency (now the NCA), the Association of Chief Police Officers (now the National Police Chiefs Council), the Crown Prosecution Service, HM Revenue and Customs, and others, sets out the balancing exercise to be undertaken when considering whether to refuse consent. A key principle is proportionality: the need to balance the public interest of the impact on crime with the rights of those who may be affected.
According to the guidelines, if the case does not prove to involve money laundering, a decision to refuse consent will cause a legitimate transaction to be frustrated. The results of this might include:
significant financial loss;
a legitimate business might cease trading; or
severe financial or personal consequences to an individual.
The result of such a balancing of interests is that, in the majority of cases, consent should only be refused when a criminal investigation with a view to bringing restraint proceedings is likely to follow or is already under way.
Obtaining a Restraint Order
A restraint order should not be easily obtained. An application for a restraint order (made to the Crown Court) can only be made once a criminal investigation has commenced (its purpose is to preserve assets for confiscation in the event of a conviction), and if there is reasonable cause to suspect that the alleged offender has benefited from his criminal conduct. The prosecution must also establish that there is a real risk of dissipation of assets by the offender. In Barnes v Eastenders Group , LJ Toulson set out the careful scrutiny required by the prosecutor and the Court in considering whether the statutory conditions for a restraint order are met:
A judge to whom such an application is made must look at it carefully and with a critical eye. The power to impose restraint and receivership orders is an important weapon in the battle against crime but if used when the evidence on objective analysis is tenuous or speculative, it is capable of causing harm rather than preventing it. Where third parties are likely to be affected, even if the statutory conditions for making the order are satisfied, the court must still consider carefully the potential adverse consequences to them before deciding whether on balance the order should be made and, if so, on what conditions. A judge who is in doubt may always ask for further information and require it to be properly vouched.
In short, there needs to be a high level of scrutiny by a judge with an appropriate degree of expertise. If the conditions are not met then the application should be refused.
Cash seizure and forfeiture
In comparison with obtaining restraint orders in the context of criminal investigations, the cash forfeiture regime under Part 5 of POCA is relatively straightforward. Cash (the definition of which includes cheques and banker’s drafts) over £1,000 can be seized by an officer if he or she has reasonable grounds to suspect either:
that it is, or represents, property obtained through unlawful conduct; or
that it is intended to be used in unlawful conduct.
A magistrates’ court must sanction the continued detention of cash within 48 hours; but unless the subject of the seizure is in a position to oppose it, this will usually be a formality. Even for the cash to ultimately be forfeited via this route, the court need only be satisfied to the civil standard that the cash derived from or was intended to be used for some kind of (unspecified) criminal activity (Muneka ).
The legislative intention was for the cash forfeiture scheme to be quick and simple. During the Committee stage of the Proceeds of Crime Bill in the House of Lords, Lord Goldsmith, the Attorney-General, in resisting a proposal to bring cash within the general civil recovery scheme in the high court, explained:
…experience has shown, and it is to be expected, that arguments in the magistrates’ court in relation to the cash forfeiture scheme will be narrower than those in relation to the new civil proceedings involving other types of property. They are likely to be narrowed to the derivation or destination of the cash; that is, to whether or not that fits the definition of recoverable property. The Government believe, and experience bears out, that the magistrates’ court is an appropriate level for such considerations and proceedings. It is expected, therefore, that the cash forfeiture schemes will be quick and simple and that there will be little room for complex arguments. Having different venues for civil recovery, where the issues are likely to be more complex, and cash forfeiture, where they are likely to be more straightforward, seems appropriate.
In practice, the cash seizure provisions have provided law enforcement almost with carte blanche to seize any significant amount of cash (the possession of which officers, and increasingly the courts, deem inherently suspicious). Those challenging the seizure carry the burden (and expense) of persuading the authorities or, failing that, persuading the court that the cash is legitimate. For this same regime to be used to seize the entire contents of bank accounts sometimes containing many millions of pounds, with considerable scope for introducing factual and legal complexities, multiplies the potential for abuse.
Early in 2016, the Money Laundering Bulletin, a practitioner-led money laundering journal, identified proposals from several law enforcement agencies, including the Metropolitan Police, to circumvent the difficulties in obtaining restraint orders by encouraging banks who have made an “exit and pay away” request to exit the relationship by issuing cheques or banker’s drafts, enabling the use of the cash seizure provisions. This is precisely what has begun to happen, with law enforcement seizing cheques or banker’s drafts, sometimes of many millions of pounds, at the point of receipt by the customer when his account has been closed, or sometimes directly from the bank.
It is to be greatly regretted that the deliberate circumvention of safeguards provided by informed judicial scrutiny was not immediately perceived to be a potential abuse of the court’s process. It suggests a level of institutional ignorance similar to that displayed in Chatwani  (where the NCA misused search warrants to install covert listening devices) and is plainly in breach of Home Office guidance. What is perhaps less surprising, but nonetheless alarming, is the apparent complicity of the banks in agreeing to issue cheques or banker’s drafts rather than returning funds electronically and then liaising with law enforcement to ensure the easy seizure of the same.
It is to be hoped that the appropriate case soon arises that will allow these “innovations” by law enforcement to be brought into the light of appropriate judicial scrutiny. Arguably, law enforcement is abusing the process of the court and their own executive power: the disclosure and consent regime is being misused to enable the inappropriate use of the cash seizure regime to seize and forfeit assets in complex cases that Parliament intended to be dealt with by the Crown Court or the High Court. It will also be interesting to see if any party that has suffered loss as a result of his or her bank’s cooperation with law enforcement (and its potential complicity in this abuse of executive power) brings a mandate action against them.