Money laundering provisions and the banker/customer relationship
Q.1 The various money laundering provisions are designed to ensure that the banker spies on his clients. However, these provisions are justified under legislation designed to prevent and detect terrorism, fraud, drug trafficking and other criminal activity and do not threaten the banker/customer relationship. Critically discuss this statement.
This question deals with the money laundering provisions which encourage banks to report any suspicious activities and transactions through their bank. The question arises as to whether these provisions are a direct threat to the banker/customer relationship.
Money laundering is the term used to describe the process which conceals the source of money. In the 1980s, there was a rise in world-wide drug trafficking and money laundering operations associated with the proceeds of that activity. These activities incite law enforcers to focus on the money laundering process and on those who are involved in this process. Money laundering can be divided into three stages, namely the placement stage, the layering stage and the integration stage. It is not possible for the launderer to legalise the money without the network of banks and other financial institutions to facilitate the three stages of money laundering. It is for this reason that these sectors have been positioned at the forefront of the drive to combat money laundering.
The United Nations (UN) took a three-pronged approach to combat money laundering in the 1988 Vienna Convention1, which requires the criminalisation of those involved in money laundering, the confiscation of the proceeds of the crime and international co-operation between law enforcers. Although the UN and other international bodies continue to develop measures to combat money laundering, the leading institution for this purpose is now the Financial Action Task Force (FATF). The UK regime also implemented legislation to combat money laundering and there are four main components relating to banks. Firstly, there is primary legislation which creates a number of money laundering and related offences. The main piece of primary legislation is the Terrorism Act 2000 and the Proceeds of Crime Act 2002 (POCA 2002).The banking and financial sector, which is at risk of being used for money laundering purposes, is regulated by the FSA2 and is subject to additional offences to encourage its co-operation in reporting suspicious activities and transactions.
Secondly, there are the Money Laundering Regulations 2003 which require banks to operate their business in accordance with specified systems and procedures designed to combat money laundering. Thirdly, the FSA reinforced the obligations imposed by the 2003 Regulations 3 by itself imposing rules which reflect this legislation. Finally, there are the Joint Money Laundering Steering Group (JMLSG) guidance notes. Colman J. in Hosni Tayeb v HSBC Bank PLC 4 All ER 1024, said that ‘a customer who opens an account at a bank in this country must be taken to accept and be entitled to assume that the bank, if it forms a suspicion covered by POCA 2002, will act in accordance with that Act and the Guidelines’.
Money laundering and financing of terrorism are two different things. Money laundering focuses on the illegitimate source of funds while financing terrorism focuses on illegitimate use of funds. Use of financial institutions to move and layer funds is a common feature between both the activities. It can be said that the mechanisms developed in seeking to combat money laundering have been adapted and applied to the financing of terrorism. In the UK, relevant provisions are now primarily found in the Terrorism Act 2000.
Provisions which are particular concerns for the banks include section 184 which makes it an offence for a person to become involved in an arrangement which facilitates the retention or control by another person of terrorist property by concealment, removal from the jurisdiction, by transfer or ‘in any other way’. If a person suspects that the source of the money is illegitimate or the money will be used for wrong purposes, he is under a duty to report that suspicion and if he fails to do so he would commit an offence. On the other hand if a person has informed the police about his suspicion then he will be absolved from it. Banks might commit these offences by taking part in arrangements enabling a customer to move funds.
The Terrorism (United Nations Measures) Order 2001 creates offences in relation to the financing of terrorism. This applies to banks and gives them the power to freeze the accounts of suspected terrorists. This might pose difficulty for the banks in respect to their relation with the customers. Once the account is frozen, the customer cannot draw money out of the bank account and would lose his right to demand money from his bank. This legislation also imposes a disclosure or reporting obligation on banks by imposing criminal sanctions for not doing so.
Section 195 imposes an obligation to report any illegal activity as soon as is reasonably practicable to a constable, irrespective of any restrictions on disclosure. So a bank might be held criminally liable if it fails to report, as soon as reasonably practicable, knowledge or suspicions that customer has committed certain offences under the order. Finally this Act creates two tipping off offences 6. The first applies to anyone who knows or has reasonable cause to suspect that the police are conducting or propose to conduct a terrorist investigation and is committed by making a disclosure which is likely to prejudice that investigation or interfering with evidence likely to be relevant to it. The second applies to anyone who knows or has reasonable cause to suspect failure to report an offence and is committed by making disclosure which is likely to prejudice any ensuing investigation or interfering with evidence likely to be relevant to it.
The Proceeds of Crime Act 2002 (POCA 2002) consolidates and extends earlier primary legislation which both penalised those involved in money laundering and gave power to the criminal courts to confiscate the profits of crime. It also renders financial institutions potentially criminally liable unless they make suspicious activity reports when they have reasonable grounds to suspect that any activity entails money laundering. These provisions are amended by the Serious Organised Crime and Police Act 2005. Liability arises not only where the alleged money launderer knows that the property is criminal property but also if he suspects that it is criminal property. It seems to be an objective test so a bank is under a duty to report even if it suspects the property to be criminal property.
Section 3277 covers concealing, disguising, converting, transferring or removing criminal property from one part of the UK. Section 3288 covers involvement in an arrangement which the alleged launderer knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person and section 3299 covers the acquisition, use and possession of criminal property without providing adequate consideration. To encourage the financial sector, including banks, tube part of the information gathering process needed to tackle money launderers, sections 330 and 331 of POCA 200210 create two new offences of failing to make a required disclosure as soon as practicable after suspicion of money laundering is or ought to have been aroused.
The offences may be committed by any person acting in the course of business in the regulated sector and any Money Laundering Reporting Officer (MLRO) 11 in the regulated sector. The Money Laundering Regulations 2003 have caused the financial sector to introduce wide ranging systems and procedures so as to ensure that its officers and employees are aware of their duty to disclose and hence they do not end up being involved in a criminal activity. There is an objective element present in the offences namely that the alleged offender must either know or suspect or have reasonable grounds for knowing or suspecting that another is engaging in money laundering. It can be said that those who are working for the banks are potentially criminally liable if they ought to have known that money laundering was occurring.
Banks have to adopt procedures that identify factors that provide reasonable grounds for suspicion of money laundering and the employees should be well trained to act on them and report to the authorities. There are several situations where common law imposes restrictions on disclosure; immunity from civil liability is provided. These types of immunity are enjoyed bay person who in the course of their trade, profession, business or employment acquires information which causes them to know or suspect or have reasonable grounds for knowing or suspecting that someone else is engaged in money laundering. Such disclosures are known as protected disclosure. This immunity protects the position of a person who is working in a regulated sector. When a person fulfils his obligation by disclosing confidential information he is acting against the principle of confidentiality. Civil law encourages that person to disclose by giving protected disclosure.
Section 333 of POCA 200212 creates an offence of tipping off. It catches anyone who knows or suspects that either a ‘protected disclosure13’ or an authorised disclosure has been made. Thus banks and their employees must take great care in not alerting their customer that this has occurred. This offence has caused several difficulties to banks when faced with the customers whom they suspect have criminal property in their accounts, as any freezing of the account after reporting suspicions to the NCIS14 may tip off the customer that this has occurred.
The Money Laundering Regulations 2003 lay down specific requirements on the banks. The first is ‘know your customer’ (KYC) procedures which require them to adopt certain procedures when they are accepting someone as their customer and to keep the records of those procedures adopted. With few exceptions banks are not required to accept the customer unless satisfactory evidence of his identity is gathered.
These provisions discussed above have made life difficult for banks, over and above the need to make significant changes to the way they deal with customers and their accounts. The conflict between their duty of confidentiality and their obligation to report suspicions of money laundering or terrorist financing has been addressed by the legislation. A bank that knows or has suspicion that the proceeds of crime are in the customer’s account faces a number of difficulties. If it does nothing and allows the customer to access the account, it risks being criminally liable for money laundering by assisting the offence and also criminally liable for not reporting its suspicions. The KYC15 obligation in the money laundering legislation increases the likelihood of such accessory liability. If a disclosure is made, it is most likely that it will qualify as an authorised disclosure and hence provide a defence to any potential money laundering offences.
If the bank refuses the customer access to the funds, the customer is likely to become suspicious that he is under an investigation and therefore the bank risks criminal liability for the tipping off, especially if the customer presses for an explanation. One judge explains this kind of situation by saying “Bank may commit a criminal offence if it pays or if it refuses to pay”. And most importantly if the suspicion turns out to be unfounded, the bank risks civil liability for breaching its contract with its customer in freezing the account and not permitting payments out.
In Bowman v Fels16, the question of confidentiality arose between a solicitor and his client. The court held that section 32817 was not intended to cover or affect the ordinary conduct of litigation by legal professionals. The court added that even if section 328 did apply to the ordinary conduct of legal proceedings, it did not override legal professional privilege or a solicitor’s implied duty not to disclose information gained from documents disclosed by another party to adversarial litigation and not read in open court. It can be argued that there is a duty of confidentiality in the banker/ customer relationship so if a banker does not report any suspicion to the authorities ; he might have a defence on the basis of Bowman v Fels except for the exceptions given in the case of Tournier v National Provincial and Union Bank of England18.
In C v S19, a bank was faced with a court order requiring it to disclose certain information. The bank had already reported its suspicions to the NCIS and was concerned that it risked committing the tipping off offence if it obeyed the court’s disclosure order. Lord Woolf MR gave some guidance to banks in such situations, basically exhorting the NCIS to engage in constructive negotiations with a bank. If this does not result in an acceptable solution, the court will rule on the matter, holding the balance between the interests of the individual seeking redress through the courts and the state in fighting crime. He further said that it would be an abuse of process to prosecute a bank which was doing no more than obeying a court order for disclosure. It might be said that the courts are willing to help the banks get out of the situations where they can be held liable either way.
In Governor & Company of the Bank of Scotland v A Ltd20, the bank applied to the court for directions, in private and without notifying the customer, and an injunction was initially ordered freezing the account. Being unaware of the injunction but anxious to have access to his funds, the customer then brought proceedings against the bank and eventually the injunction was discharged and the bank incurred significant legal costs which it sought to recover from the customer. The Court of Appeal found against the bank and gave limited guidance as to how banks should approach such a dilemma in future. Lord Woolf MR stressed the need for the authorities to co-operate with the banks to try to find sensible solution as to what could be revealed to the customer, but again if a bank was unsatisfied it should apply to the court for interim declaratory relief. In this way the court order would protect the bank from criminal prosecution. However, issues regarding civil liability are still unresolved.
It might be argued that there are several provisions which are designed to combat money laundering and as discussed above they are justified under legislation to combat terrorism. If money laundering or financing of terrorism has to be figured out all the provisions have to be fully implemented. The requirement to report money laundering, appoint a compliance officer to consider any reports made and decide whether to pass them on to relevant authorities and to refrain from tipping off the customer or third-party should be fully enacted. But on other hand this has an adverse effect on the relationship between banker and customer because banks are required to keep customers’ accounts under observation to satisfy the requirements.
Ellinger’s Modern Banking Law, Fourth Edition, Ch 4, Pg 94-116
1 This came into force on 11th Nov. 1990 and was implemented in the UK by the Criminal Justice Act1990
2Financial Services Authority
3Money Laundering Regulations 2003
4Section 18 of The Terrorism Act 2000
5Section 19 of The Terrorism Act 2000
6Article 8(6) of The Terrorism Act 2000
7Section 327 of The Proceeds of Crime Act 2002
8Section 328 of The Proceeds of Crime Act 2002
9Section 329 of The Proceeds of Crime Act 2002
10Proceeds of Crime Act 2002
11This person will himself generally be criminally liable under either sec 331 or sec 332 if he does not pass the information on to the National Criminal Intelligence Service (NCIS)
12Proceeds of Crime Act 2002
13A disclosure which is subject to civil immunity
14National Criminal Intelligence Service
15Know Your Customer
16 1 W.L.R. 3083
17The Proceeds of Crime Act 2002
18 1 KB 461
19 2 ALL ER 343
20 1 WLR 751