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The laundering trap


The Proceeds of Crime Act and the Money Laundering Regulations have a lot of sectors - from lawyers to construction - worried.Certain rules seem to damn you whatever you do and as yet there is no case law to clarify things, writes Guy Cottam

THE PROCEEDS of Crime Act 2002 and the new Money Laundering Regulations 2003 came into effect earlier this year.

The Act was drawn up to prevent money laundering by criminals, particularly those involved with hard drugs.But the Act has been so widely drawn that many groups may well be trapped by it.

The regulations require that anybody involved in a 'relevant business'must have procedures by which to secure the identity of those with whom it enters into contract.When that other party is a company, evidence of the company's registration number and its directors is easily obtained.

But there could be a problem when the other party is a private individual.With honest people, the only problem is the embarrassment of having to ask to see a driving licence or passport, but anyone intent on criminal activity won't find it too difficult to hide his identity.

Another problem is that the definition of a 'relevant business' is widely drawn and includes any 'activity of dealing in goods of any description by way of business'.This seems to cover most activities in construction.

The act created a quango called the National Criminal Intelligence Service and it is the duty of any business or individual to report suspected wrong-doings to this organisation. This means anyone who suspects a person is trying to conceal, disguise, convert, transfer or remove money that has been obtained through criminal activity must report it and cease any dealing with that person until permitted to continue by NCIS.

For one-off deals that would not pose any problem. NCIS undertakes to decide within seven days, which would be acceptable in most instances. But for someone like an adjudicator, who has been appointed to settle a dispute within the statutory 28 days, a hiatus of seven days could be crucial.

An added complication is that the person making the report commits an offence if he discloses that he has made the tip-off. In fact, anyone who knows or suspects that a disclosure has been made will be breaking the law if they share any information that is likely to prejudice an NCIS investigation.

The penalty for disclosure is up to six months in jail or a fine.

The Law Society is so worried about the implications of all this for solicitors that it has petitioned the Government for a review of the legislation. But it is not just lawyers who risk being compromised. In the construction industry architects, quantity surveyors and engineers could easily find themselves working for a client who they come to suspect has obtained the funds for the project illegally.

Consider the position of the architect or engineer who, just when he is about to certify a payment to the contractor, discovers something that suggests the project is being used to launder money. The Act would require him to stop work until NCIS gives him the all-clear and at the same time prevent him from telling anybody the reason why he had failed to certify.

All the major adjudicator nominating bodies are very concerned about the position of adjudicators. But mediators could find themselves in a really impossible situation.To stop a mediation half way through for no apparent reason must send a clear signal to any wrong-doer that he has been knobbled.Would stopping of the mediation itself constitute an act of disclosure? It could be a criminal act and the mediator would be damned if he did or did not stop.

A clerk of works or resident engineer could also be in the same position if he suspects that a contractor was paying his subcontractors with money from criminal activities - for example by making payments in cash.

A 'relevant' business is required to take measures so that 'relevant' employees are given training in how to recognise and deal with transactions that may be related to money laundering. Again the definition of money laundering appears to cover any benefit resulting from criminal conduct.

One judge has already suggested that unbalancing rates in tenders or presenting excessive claims could come into that category.

A number of professional institutions and trade bodies have taken advice from leading lawyers but that advice is contradictory.Most of these bodies are offering advice to members.The Law Society has comprehensive guidance to the Act and the Regulations at www. lawsociety. org. uk/home. law.

The Government has agreed to the Law Society's request for a review but we will not know who is and who isn't affected by the law until we have some judicial decisions.The first case goes to the Court of Appeal later this month. In the meantime, assume that the Act applies to you.

Key points

The Proceeds of Crime Act and the Money Laundering Regulations could affect everybody.

The law requires that you satisfy yourself that you know the true identity of each client.

You should assume that you have a duty to report suspected fraud to NCIS.

The penalty for non-compliance includes a prison sentence of up to six months.