Serious Crime Bill 2014
As some readers will be aware, the House of Commons is currently considering the Serious Crime Bill 2014 (the “Bill”), which proposes amendments to various pieces of existing criminal legislation, including the Proceeds of Crime Act 2002 (“POCA”).
- Serious Crime Bill 2014 http://bit.ly/1upvzAj
On 8 January 2015, Karen Bradley MP (Minister for Modern Slavery and Organised Crime) announced
that she had tabled new amendments to the Bill, including a new clause to be included in POCA relating to the submission of suspicious activity reports (“SARs”) and protecting those who submit a SAR in good faith from incurring civil liability.
Although the Bill has yet to be enacted (and there is therefore no guarantee that POCA will be amended in the way proposed), this is a welcome development for banks and other regulated institutions, providing additional clarity and protection as they seek to navigate the POCA reporting obligations.
Background to POCA and suspicious activity reporting
POCA imposes an obligation to submit a SAR to the National Crime Agency (the “NCA”) in circumstances where there is knowledge, suspicion or reasonable grounds to know or suspect that a person is engaged in money laundering. Additionally, where the reporter (often a financial institution or another regulated sector entity) is proposing to carry out a transaction which might otherwise involve the commission of a money laundering offence (such as transferring criminal property, or being involved in a money laundering arrangement), filing a SAR and obtaining consent from the NCA enables the reporter to avoid committing that money laundering offence. This latter type of report, commonly called a “consent report” is formally known as an “authorised disclosure” pursuant to section 338 of POCA.
Where consent is sought for a prospective transaction, there will be a (typically short) delay between the firm filing the SAR and receiving consent, during which time the transaction cannot be processed. Where the NCA refuses consent within seven working days, a 31 day “moratorium period” kicks in, during which the transaction cannot be processed.
Difficulties have previously arisen for firms where customers allege that they have suffered loss as a result of delays in processing transactions whilst the firm waits for consent (or waits for the expiry of the moratorium period). The position is often exacerbated by POCA’s “tipping off” provisions, which may prevent a firm from informing its customer of the reasons for the delay.
In the long-running case of Shah and others v HSBC Private Bank (UK) Limited [2010] EWCA Civ 31 and [2012] EWHC 1283 (QB) 201
- (see briefing on the Shah litigation http://bit.ly/1ySgVWi ),
the Court of Appeal held that, in circumstances where a customer suffers loss as a result of a failure to carry out a transaction, the bank or other institution can be required to prove at trial that it in fact held a good faith suspicion of money laundering (albeit that, in line with previous case-law, ‘suspicion’ is a relatively low threshold).
Subsequently, the High Court also held that, if there is no express contractual term to this effect, the courts will imply a term that permits a firm to refuse to execute payment instructions in the absence of “appropriate consent”, where a SAR has been made. The case-law is therefore broadly helpful to regulated firms (and HSBC was ultimately successful in the litigation), but the case underlines the litigation risk to which firms are exposed in these circumstances.
Proposed amendments to POCA
The new clause proposed to be inserted into POCA seeks to introduce a similar, but more certain, protection from civil liability in a statutory form. The new clause
- (which can be found here – http://bit.ly/1upvEE5 )
provides that, where an authorised disclosure is made in good faith, “no civil liability arises in respect of the disclosure on the part of the person by, or on whose behalf, it is made”.
The government has stated that this amendment will strengthen the UK’s compliance with the Third EU Anti-money Laundering Directive (2005/60/EC) (“3MLD”) and will increase trust and confidence in the SAR regime by providing greater legal certainty. This amendment has also been supported by the British Bankers’ Association.
The new clause was debated on 13 January 2015 and has received support in the House of Commons.
One point which does not appear to have been addressed is that the clause protects firms only when making authorised disclosures and not, therefore, when they are making SARs pursuant to sections 330/331 of POCA.
Whilst the case-law to date has focused on loss allegedly caused by the making of consent SARs, and the problem is particularly acute in this scenario, it is not impossible to envisage circumstances in which a customer could allege that it has been caused loss by a SAR made under section 330/331.
If the rationale for the introduction of the clause is indeed to comply with the 3MLD (presumably, although this is not entirely clear, the Article 27 obligation on Member States to “take all appropriate measures in order to protect employees of the institutions or persons covered by this Directive who report suspicions of money laundering…from being exposed to threats or hostile action”), it would seem preferable to extend the protection to cover any “protected disclosure” as defined in section 337, so that the civil liability protection has a consistent scope with the carve-out from otherwise applicable confidentiality restrictions.
Conclusions
Although the proposed amendment to POCA appears to have been positively received in recent debates, there remains a possibility that the position could change between now and the passage of the Bill.
If POCA is amended in the way described above, we would expect this to be a welcome development for the financial sector, allaying some of the concerns about civil liability that remain following the Shah litigation.
Ms Bradley emphasised in debate, however, that banks and other institutions should not see the amendments to POCA as a justification for the submission of “defensive” SARs; institutions should continue to only report those transactions about which they hold a genuine suspicion.
Further, even if the clause is enacted, it will remain the case that, in the unlikely event of a SAR being made in bad faith, a challenge will be possible. It will remain important, both as a matter of good practice and risk management, for firms to continue to ensure that their internal documentation is sufficiently comprehensive to enable them to demonstrate the basis for their good faith suspicion, should this later be challenged.
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