In this post we are getting right down to what a French friend of mine once called “the nitties and the gritties”, so thinking caps on, please. An MLRO has written to me with a vexing conundrum around consent concerning the suspected proceeds of tax evasion, so you might need a coffee and some biscuits as well, and maybe even a damp flannel for your forehead. Here we go – here is his query in full, in his own sad and baffled words:
“Where I as an MLRO form a suspicion that a client is engaged in tax evasion I will almost always form a suspicion that they are necessarily involved in money laundering as well, via my bank or elsewhere. This of course engages not only my ability but my duty to make a disclosure to the authorities. I then reluctantly turn my mind to the painful process of consent if I wish to pay the funds away to exit the client, or if we receive a payment instruction from the client, [which raises the question] of whether I suspect the funds in the account to be criminal property.
“In tax evasion cases I find this quite difficult. The funds are legitimate (let’s assume) but the client may not have declared them for tax. That doesn’t make them criminal property in toto but does it make part of the funds (representing the amount that would otherwise have been paid over to the tax authority) criminal property, as it represents a person’s benefit from crime. But why the funds in that account as opposed to funds in the client’s name with another bank? He can settle his tax liability from any account, so why would my [bank’s] funds be criminal property rather than someone else’s? Just because they are undeclared doesn’t make them criminal property…
“I am still pondering the issue in light of R v William. The legal position seems to be that in tax evasion cases the gross turnover is criminal property, not just the sum avoided. In personal tax evasion cases that suggests all income during the period of evasion is tainted. That would make it both easier and harder for an MLRO: easier as it’s all tainted but harder in that one ought perhaps to identify (at least so one forms a suspicion) when the evasion started and whether the funds are from that period. (Most of mine are, as clients helpfully state they’ve not declared them for tax!)
“The underlying legal argument is the wording of s340(3)(a) of POCA, that property is criminal property if (inter alia) it represents a person’s benefit from crime in whole or in part. The court’s interpretation seems to be that if any part of a sum is derived from criminality it is all criminal property.”
This last point is what I call the Ribena principle – one drop of dodgy money and the whole glass is contaminated – which is what I have always applied, but perhaps rather simplistically. So over to you, learned readers: I know we have plenty of MLROs, some police officers, a few regulators, a handful of lawyers and some FIU staff. Between you, you must have some opinions – please share them.
I can see the MLRO’s thought process and why he is concluding that the funds are technicaly speaking legitimate up until the point of evasion. However my understanding under the current legislation is that all the funds would be considered tainted . I think if the MLRO has suspision their duty is to report as much detail in relation to this suspicion and then it is for the courts to decide on whether all the funds should be considered criminal proceeds.
Thank you for your comment, Niki, and welcome to the blog.
This is the very point we want to tease out. Like you – and I think, until this point, our MLRO – I had always thought that all funds should be considered tainted. But let’s push it to the limit and say that you are certain that all the proceeds of a client’s tax evasion are in an account elsewhere, not at your bank. Does that mean you should make a SAR? If so, then any halfway point – “I think his dodgy money is elsewhere” or “I think most of his dodgy money is elsewhere” – would also generate a SAR.
Waiting for more comments, readers!
Best wishes from Susan
Not that it assists in this instance but it’s another reminder (if one is needed) that suspicions are way easier dealt with at the on-boarding stage. Looking forward to comments that might give pointers here.
Quite right, Roy – stable doors and all that (not that it applies directly in this case, but as you say, work done up front often pays unpredicted dividends by diverting suspicions).
Best wishes from Susan
You have not indicated what type of activity your MLRO’s business is engaged in – a bank? a solicitor? an accountant? a money service business? an estate agent?
I have to say s340(6) PoCA 2002 troubles me with regard to tax evasion. If an alleged offender obtains a pecuniary advantage he is TAKEN TO OBTAIN a sum of money equal in value to the advantage. But there is not a real identifiable sum of money which actually IS the pecuniary advantage.
Courts have effectively said, as you have indicated, that the undeclared turnover is itself in part that pecuniary advantage. Therefore the turnover is criminal property, see also R v IK  EWCA Crim 491.
So I think the safest course is to conclude that one holds a suspicion that the alleged offender is engaged in money laundering (which presumably triggers an obligation to report) & to further assume that the funds one holds are tainted (triggering an obligation to seek consent). That will effectively also trigger an obligation to ‘freeze’ pending receipt of that consent.
For completeness I should add that if the MLRO’s business is that of solicitors or accountants then PoCA privilege may apply – see s330(6)(b). Indeed if the MLRO’s business is solicitor / lawyer then common-law legal professional privilege may apply.
This MLRO is at a bank, which simplifies things re privilege – quite right to clarify. Your reasoning is very helpful – indeed it is not just the criminal “earnings” that we have to consider, but the entire criminal “benefit”, and who knows that this client may have done with the money he has “saved” by (we think) not paying his tax…
Best wishes from Susan
That brings us on to another issue. A bank can (& sometimes does) ‘freeze’ a customer’s account without warning or explanation & without giving a date by which it will be ‘unfrozen’. In the case of a business customer that will mean that wages & suppliers cannot be paid – which could be fatal to the business. But there is effectively nothing the customer can do to get the bank to ‘unfreeze’ the account.
You & I know (& the customer will soon realise) that this is because the bank has found a reportable suspicion of money laundering (or terrorist financing). But once the reporting process has been put in motion the provision of further information & explanations by the customer to his local branch is likely to be of no avail. The matter may then be in the hands of the NCA & the bank powerless to ‘unfreeze’ the account without NCA consent.
This seems to be (for an innocent customer) a problem which is incapable of resolution in an acceptable timescale.
Quite by coincidence, I attended a meeting yesterday during which I learnt a great deal about the SAR process and the various players within it – and looking at the number of SARs made versus the number of staff available to deal with them, I now have more sympathy with the scale of the task.
The definition of “an acceptable timescale” is rather fluid – what is acceptable in a commercial environment (moreover, an accelerating commercial environment) is not necessarily what is acceptable to the legal system (to allow due process and transparency) or indeed what is possible given the constraints on staff numbers. A far from ideal situation, granted, and sadly one which occasionally does disadvantage the end user, but not one that is easy to resolve.
Best wishes from Susan
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