Proceeds of crime

Annabel Darlow QC
Will Hays
Annabel Darlow QC and Will Hays
19 December 2017

Money-laundering: a possible loophole for property derived from 'registration offences'?

The US special investigation into ‘Russian influence’ in the 2016 US Presidential election alleges that Paul Manafort acted as a “foreign agent” and that he laundered the proceeds of that conduct. This article considers the case law from England and Wales that may suggest that any property acquired by Mr Manafort through his activities as a “foreign agent” would not count as “criminal property” so that there could have been no “money laundering”.

The starting point of the discussion is the underlying criminal conduct alleged in the USA: it is unlawful to act as an agent of a foreign principal unless a true and complete registration statement has been filed with the Attorney General (Title 22, United States Code, sections 612 and 618). The offence follows a familiar form, whereby certain conduct is lawful provided it has been properly ‘registered’ or ‘licensed’. Such an offence may be described as a ‘registration offence’.

In this jurisdiction it has been held in the context of certain registration offences that a person, D, who commits such an offence does not in law obtain any property “as a result of or in connection with” his criminal conduct. For example, in R v Sumal and Sons (Properties) Limited [2012] EWCA Crim 1840, [2013] 1 WLR 2078 it was held that where a person committed a criminal offence by renting out a property without a licence, the rent was not obtained as a result of the criminal conduct. The Court held that the rent was obtained as a result of the rental agreement, not because no licence was in place. Similarly, in R v McDowell and Singh [2015] EWCA Crim 173; [2015] 2 Cr. App. R. (S.) 14 the Court of Appeal held that where a person profits from the criminal offence of unregistered scrap dealing, he does not “obtain property” as a result of that offence. The profits were obtained as a result of the scrap dealing, not as a result of the failure to be registered.

The argument adopted by the Court of Appeal seems to depend on the idea that it is possible to divide the circumstances of the criminal conduct into (a) the actual conduct – which was lawful apart from the fact that he was not registered and (b) the context which rendered the conduct “criminal”, namely the failure to be registered.

These authorities were concerned with confiscation under Part 2 of the Proceeds of Crime Act 2002. Since nothing was obtained from the criminal conduct there was no “benefit” and there could be no confiscation of assets. However the argument reads across to money-laundering: if nothing is “obtained” from a registration offence, there can be no “criminal property” to be laundered. If the argument is correct, it means a person accused of money laundering could mount a defence on the basis that the money derived from a registration offence.

But the argument has unpalatable consequences. It is lawful to supply controlled drugs provided a licence is in place (see Regulation 5 of the Misuse of Drugs Regulations 2001). Pushed to its logical conclusion the argument suggests that it would be a defence to money laundering to say that the money derived from the supply of controlled drugs (which would be lawful if the person obtained a licence). The argument would be that the money derived from a registration offence (the supply of controlled drugs) and since a person who commits a registration offence does not obtain anything as a result of that offence, no criminal property came into existence which could be ‘laundered’.

Quite apart from the potentially absurd consequences of the argument identified above, there are at least two reasons to be cautious before advancing the argument. First, context is key. The Court of Appeal has held, distinguishing the other cases, that a person may “benefit” from his crime in the following contexts: unlicensed arms dealing (McDowell and Singh, supra); unlicensed security provision (Palmer [2017] 4 WLR 15) and carrying on business in a prohibited name (Neuberg (No 2) [2017] 4 WLR 58). Second, whether a “benefit” can be obtained from a particular registration offence seems to depend on whether the conduct is (a) unlawful, except where covered by a licence or (b) lawful, but only where covered by a licence. This is a fine distinction which appears to be a distinction without a difference.

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Cryptocurrency and restraint: police permitted to convert seized Bitcoins

The Crown Court has granted a novel application by the police in restraint proceedings to convert seized Bitcoins into sterling.

R v Teresko (Sergejs)

Kingston Crown Court: HHJ Lodder QC, 11 October 2017, unreported.

Surrey police searched the home address of the defendant who was subsequently convicted of drugs and money-laundering offences. A piece of paper was found containing a bitcoin recovery phrase, which enabled police to seize 295 bitcoin worth £975,000. Confiscation was outstanding. An application was made by the CPS for a restraint order over the defendant’s assets under s41 Proceeds of Crime Act 2002, including an application under s41(7) for an order permitting the police to ‘convert’ the 295 bitcoin into sterling, owing to the volatility of bitcoins, and their vulnerability to attack, even when held in a dedicated police bitcoin wallet. It was accepted that this was an entirely novel application. Evidence was adduced of two alternative methods for conversion of bitcoin: public auction, a method successfully used in the United States, and an bitcoin exchange, used by the Dutch police for over 5 years and subject to due diligence by UK law enforcement.

Held, the application was granted. The Court was satisfied that the power to make such an order was available under s41(7) POCA, and that it was appropriate to make the order. The appropriate means of conversion was the approved bitcoin exchange. The fees for undertaking the conversion were lower than those at public auction, and the effectiveness of using a bitcoin exchange had been established.

Commentary

Bitcoin and other cryptocurrency are widely used by lone criminals and organized crime groups to launder their proceeds, but law enforcement and the courts are only just beginning to consider the adequacy of existing powers. In the present case, the prosecutor was able to point to the wide power under s41(7) POCA which enables a court to make “…such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective”. Long before the POCA legislation, the courts had recognized that they had a power to make ancillary orders in connection with restraint orders, in the same way that they did in connection with civil freezing orders (Re O [1991] 2 QB 520, applying AJ Behkor v Bilton [1981] 2 All.E.R. 565). Novelty has not been bar to the courts developing new types of ancillary orders in the civil context (Bayer v Winter [1986] 1 WLR 497, order requiring the surrender of a passport) and the need for flexibility to deal with “new situations” has been again reiterated by the Court of Appeal (JSC BTA Bank v Ablyazov [2014] 1 WLR 1414, overturned on other grounds). Nor is it an objection in principle that unlike most ancillary orders, the order in this case was not against the defendant (such as disclosure, repatriation) but was in favour of a third party, the police; there is precedent for ancillary orders being directed at third parties (as in (Re D (Restraint Order: Non Party), The Times, 26 January 1995, requiring disclosure by a non-defendant). Aside from objecting to the overall novelty of the situation, it could have been said that the police were not properly qualified to carry out a transaction of this nature and that a receiver was better placed to perform it. In the present case the CPS adduced evidence that considerable thought had been given to the best means of effecting conversion to sterling. The fact that a (costly) receiver might have been appointed did not mean that such an order was not permissible. Alternatively it might have been said that the value of bitcoin was bound to go up further (as it had since the original seizure) and therefore that the defendant would lose out. This argument had less force in a post-conviction case where the defendant, facing confiscation proceedings in which the assumptions would apply, was unlikely to retain any part of these assets, whatever happened to the value of bitcoin in the interim.

A further interesting aspect of this case, which was not an issue for the Crown Court, is the original seizure of the BitCoin by Surrey Police: this will be the subject of a further blogpost.

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Politically exposed persons

The Fourth Money Laundering Directive was transposed into UK law when the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017. The change allows firms to take a more nuanced approach to assessing the risks posed by politically exposed persons (“PEPs”).

The new regulations were released in draft form in mid-March and represent a significant change in anti-money laundering regulation.

PEPs are defined as people who have a prominent public function in the government. Foreign PEPs (including their family members and business associates) have long been subject to enhanced due diligence. From now on domestic PEPs will be subject to the same regulations.

Proportionality

The justification for the enhanced treatment of foreign PEPs is that their very position leaves them exposed to bribery and corruption. The measures are said to be preventive, rather than punitive. However, it has long been a complaint that all foreign PEPs are treated alike.

Under the previous regime, there were often complaints that a disproportionate application of enhanced due diligence (“EDD”) to PEPs. The new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.

The new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.

It is recognised that some firms have been distinguishing between high- and low-risk PEPs for some time and tailoring their EDD accordingly. The regulations now endorse that approach. They make it clear that when dealing with PEPs, firms must assess the level of risk associated with that client and the extent of the EDD to be applied. Regulation 35(4) specifically provides that the extent of the EDD measures to be taken in relation to a PEP may differ from case to case.

Level of risk

There is evidence that some banks have been turning away clients who are PEPs, and their families, because of their status. HM Treasury has stated that refusing to establish a business relationship or to carry out a transaction simply because that person is a PEP is contrary to the letter and spirit of the law and issued a strong guideline that firms must not form judgments based solely on anyone’s status as a PEP.

It states:

 ‘when assessing the level of risk posed by UK PEPs and the extent of EDD to apply, firms should take account of the UK’s position as a world leader in the fight against corruption, money laundering, and terrorist financing.’

The consultation on the regulations goes on to say that the government would expect that UK PEPs should generally be treated as lower risk and firms should apply EDD accordingly: ‘It is right that low-risk PEPs should be treated at the lowest level, just as it is right for high-risk customers to face more stringent measures’.

Future Guidance

The Financial Conduct Authority is currently consulting on guidance on the treatment of PEPs, their family and their associates. Factors which are considered to be relevant to assessment of an individual’s risk as a PEP include:

  1. Their prominence in public life and level of influence within their organisation;
  2. Their ability to control public or party funds;
  3. Whether they have already been subject to disclosure requirements such as registers of interest or independent oversight of their expenses;
  4. Whether the PEP is associated with the local branch of a political party or the national one and whether they have any elected MPs;
  5. In the case of a foreign PEP, the level of risk associated with the country that appointed them;
  6. Whether they have stopped performing the prominent function in the preceding 12 months; and
  7. Relevant media coverage.

Under the new regulations, firms must continue to apply EDD for at least 12 months after the PEP ceases to perform a prominent function. However, they will not be obliged to apply EDD to the PEP’s family and business associates because they would no longer have the same connection to an influential person.

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