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

Annabel Darlow QC
Will Hays

Annabel Darlow QC and Will Hays
19 December 2017

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.