Defining predicate crimes
There are two approaches to defining predicate crimes: a list of predicate crimes or "all crimes". Some countries have adopted a combination of the two and some have cross-referenced to an existing penal code. The Financial Action Task Force has allowed this to continue despite the fact that criminals are able to exploit the differences.
It is imperative that a common standard be adopted. Those countries with a lists-based approach have suffered considerable difficulty in getting laws passed, and in particular getting offences such as corruption added. Thailand and Kenya are examples. Thailand was, some years after adopting a list of seven (yes, seven) predicate offences able to increase the list to 12, one of which was corruption. In the first year of the new list (which has since been expanded further) corruption cases accounted for 80 per cent of the money and other assets confiscated by the financial intelligence unit (about which more later). Kenya failed to pass a counter-money laundering law at all for several years. Incredibly, when one was eventually passed in 2010, corruption was included, but only at the expense of excluding terrorist financing.
Malaysia was encouraged to adopt a list-based approach by technical assistance teams from the US and Australia. They were wrong to do so and, as a result, Malaysia, like the US, now has more than 300 offences in a list and, like the US, there are some serious inconsistencies. One of the effects of globalisation and of a more active United Nations and other bodies has been a gradual harmonisation, perhaps even homogenisation, of all manner of laws. It makes no sense that offences under near-identical laws in two countries should be treated differently for money laundering purposes.
Moreover, because of the FATF's 40 Recommendations, countries must include in their counter-money laundering laws a provision that those dealing in assets resulting from an offence in country A and laundering them in country B must be liable to prosecution in either or both countries. There is a caveat, however: this applies only where the criminal conduct in country A would also have been criminal conduct in country B.
This author's research has failed to turn up any case which has determined whether that is to be read as implying that the conduct should also be specified as a predicate offence in both countries, for it would seem to be at least a defence worth arguing if the proceeds of conduct which are criminal in both countries, but not listed as a predicate offence in country B, are capable of being laundered. The arguments on this aspect of the law have all focussed on the so-called "bull fighting" issue, where bull fighting is illegal in the UK but not in Spain and the question arises as to whether a British matador launders the income he generates from his profession. This author therefore argues that the correct approach in any properly drawn law should be for "all crimes" legislation, and even that term has its confusion.
Since the early 1990s, some countries, for example, the UK, have broken ranks with the original definition, i.e., all "serious" crime, which meant offences for which a convicted person could be (not is) sentenced to one year or more in jail. Under UK law, for example, there is now no minimum penalty threshold for a predicate offence. In consequence, the duty to report relates to any and all offences from which a person may make a direct or indirect profit.
This makes sense: as the range of businesses that are expected to make reports grows ever wider, and ever further away from those who traditionally have well-educated front-line staff, it is madness to expect the majority of those to whom reporting requirements now apply to be able to decide if a particular course of action is included in the range of predicate crimes.
People decide what is right and wrong based on their own morality. Hence, very few people report tax evasion but the same people would generally be likely to report benefits fraud. However, laws are based on a common morality as interpreted by the government of the day. In general, the two are broadly in line.
It does seem clear that people do not decide what is right and wrong based on whether a law says it is a crime. Sometimes, as with the tax evasion example, that is because many people think "lucky chap" when they see someone evading tax, or because they like the idea that someone is out-smarting the government. More often, however, it is because people simply do not know, despite the presumption that everyone knows the law, what conduct is and is not a crime, apart from those that are obviously against the common morality such as theft.
The man in the street, or the mechanic in a car dealership, knows nothing of insider dealing and therefore would not have any inkling that he should report dealings in the proceeds of such an offence.
The situation is complicated enough, therefore, without making things worse by requiring that man in the street to know what the penalty for the offence is, or , the absolutely worst-case scenario — whether it is one of several hundreds of offences in a list. The effectiveness of laws is further undermined by using a list because it opens the way for someone to decide not to make a report because, although he knew that the conduct was criminal, he took the view that it was an offence which was not on the list rather than one which was. Counter-money laundering law therefore needs to be simplified so that opportunities for confusion and innocent or deliberate "mistake" are removed.
"Crime" v "criminal conduct"
There is a distinction between the phrases "proceeds of crime" and "proceeds of criminal conduct". The distinction has arisen because some judges found that, where legislation referred to "proceeds of crime", the prosecution needed to prove that a crime had in fact been committed. At least in the case of the UK's original law, that amounted to taking one phrase and ignoring another which qualified it.
For example: "where a person knows or suspects that another person is dealing with the proceeds of crime". In this author's opinion, there is only one correct interpretation, and the word that carries the most weight in that sentence is "suspects". It surely cannot be a reasonable interpretation to say that a person may be suspicious of the nature of a transaction but must have actual knowledge of the predicate offence. Such an interpretation emasculates the provision which, at least in part, was designed to take account of foreign money being laundered in the UK, especially where foreign enforcement agencies are reluctant or unable to cooperate, as is often the case with Russia.
There have been other interpretations of similar wording. Some junior courts in some states in the US have held that there must have been a conviction for the predicate offence. That is most certainly not what the provision is intended to say in most jurisdictions. Further, in some courts, it has been held that the person suspected of laundering must be proved to be aware of not only the precise offence (e.g., bank robbery compared with embezzlement) but the actual course of conduct which led to the money now being laundered. In short, to know which bank robbery the money came from; that it is not enough to show that he knew or had reason to suspect that it came from "a bank robbery".
It is imperative that convictions for laundering can be obtained without proving an actual crime. This is especially so where the predicate offence may have taken place in a jurisdiction that does not cooperate with the jurisdiction where the funds are laundered. For example, despite Russia's demands relating to industrialists and political figures and their wealth, it refuses to assist the UK with investigations in Russia. As a result, it is almost impossible for an English prosecutor to prove an actual crime in Russia, which is why more modern legislation contains the phrase "criminal conduct".
A good draft should remove any prospect of uncertainty and ensure that the intention is clear. It should provide that where a person is accused of laundering the proceeds of his own criminal conduct, that a specific crime is alleged, although not necessarily proved. Where a person is accused of laundering on behalf of a third party, then it should be sufficient to prove (if necessary with the aid of proving wilful blindness) that the person knew or ought to have known that the assets to which the charges related were or may be the proceeds of criminal conduct, whether or not an offence has been charged.
This is important in relation to those who suddenly amass wealth with no obvious explanation for it. In the case of reporting (short, therefore, of actual laundering) it is information such as this which forms the bedrock of the "kingpin" style financial analysis. Those who help the suddenly wealthy to use or invest money are therefore doubly important in collecting and reporting data.
It should be noted that in the Scottish case of Ahmad v Her Majesty's Advocate  HCJAC 60/ HCJAC 21 of February 1, 2011, the appellant had been convicted of failing to file a report (under UK law this is confusingly known as "make a disclosure", a term we should exclude). Among his grounds of appeal were that, even if he was suspicious, he had no way of knowing what crime may have been committed or even if a crime had been committed.
The Scottish Court of Appeal found that it was not necessary for a specific crime to have been committed in order for the suspicion necessary to raise the obligation to file a report. This case cited R v NW and Others  EWCA Crim 2, in which the court said: "The statutory words appear to contain no reference, certainly no express reference, to any need to particularise the crime or class of crime in question." It is here argued that that was the intention of parliament when drafting the Criminal Justice Act 1993 (which included the provisions that became part of the Criminal Justice Act 1988) and that all previous attempts at interpretations to the contrary were flawed.
This would not have been so, however, if a prosecution had been brought under the old law relating to laundering the proceeds of drugs trafficking: in that case, it would have been necessary to prove at least involvement in drugs trafficking, although not a specific transaction. It is on this specific point that the author recommends that the funding of terrorism is treated, for these purposes, in the same way as the funding of any other future crime. Otherwise, it becomes necessary to prove some involvement in a proposed terrorist act when acts preparatory to terrorism may have many other possible explanations.
UK terminology: "disclosure"
As noted above, UK law (and some others based upon it) refer to "disclosure". Aside from being an unnecessarily technical term, it is used in two completely different contexts:
• An "authorised disclosure" is where a person files an internal report based on suspicion or a report based on suspicion is filed with the FIU or other competent authority.
• An "unauthorised disclosure" is one which could lead to a prosecution for tipping off.
A properly drawn law should not confuse. In any case, the more widely understood term is "Suspicious activity/transaction report" (SAR or STR) or reports made internally or to the FIU, etc., and there is no need to give a name to the conduct which constitutes tipping off and therefore get bogged down with definitions. In the case of tipping off it is simply "informing anyone of any fact which ..." and the related charge would be "did inform x that … ".
Tipping off is not consistently dealt with in all countries but it should be. Further, in some countries there are several qualifications which mean that it is relatively easy to avoid. To be effective, the offence should be as simple as possible and the language as clear as possible.
In a properly drawn law, then, tipping off should be defined in terms that make it clear that if a person knows or suspects that an SAR has or will be filed in relation to the conduct of a third party, then it will be an offence to inform any person, including but not limited to the third party, of any fact relating to the SAR, any circumstances leading to the SAR or any consequence of the filing of the SAR. The get-out that is almost universally added, i.e., that the person making the tip-off has reason to suspect that an investigation might be prejudiced, merely weakens the effect and intention of the paragraph. By creating an absolute offence, it is easier to explain it to staff as a simple "you must not do" rather than a "you must not tell anyone but if you do, then make sure you are careful who you tell". Further, it removes the defence that the person tipping off might say: "I just told my friend in a bar, how was I supposed to know he knew Mr X?".
"Failure to train" defence
The UK is unusual in that it has, in the Proceeds of Crime Act 2002, a defence upon which an employee in the regulated sector can rely. The defence is that the person's employer has failed to provide appropriate or adequate training. This, it should be obvious, militates against the effectiveness of the general law which requires the filing of a report by anyone, regardless of the nature of their employment.
Such provisions should not be included in laws as a defence. They may, however be regarded as mitigating circumstances. Of course, if it is true, then an employer who is required to implement proper training will be guilty of an offence.
Illegal v unlawful
A further inconsistency has crept into laws around the world in the past decade: one which, perhaps surprisingly, can even be found in the Proceeds of Crime Act 2002. There has been a tendency to mis-classify conduct and to call "illegal" conduct "unlawful". The distinction is simple: illegal conduct breaches the criminal law, whereas unlawful conduct is an infringement of a civil right. It is therefore flawed, in a statute dealing with criminal law, to refer to "unlawful". Regrettably, a significant number of laws and regulations around the world now contain this error.
The argument may appear pedantic but in fact it is highly material. It is important to avoid confusing the criminal law with enforcement of civil rights. The boundary is already blurred as a result of "civil penalty" regimes and the use of the civil procedure burden of proof in relation to the provenance of an asset (i.e., on a balance of probabilities, is it more likely that the assets represent the proceeds of criminal conduct than not).
Just because something has been obtained unlawfully does not mean it has been obtained illegally. If a neighbour encroaches on your land and plants potatoes, your remedy is not for the illegal occupation of your land, it is a civil action for the profits earned from your land and an order that it be vacated. Your neighbour has acted unlawfully (trespass and made a profit from your assets) but he has done nothing illegal. The profits are therefore recoverable in a civil court but, because they are not the proceeds of criminal conduct, they cannot be subject to any action under counter-money laundering laws. A properly drawn law should therefore ensure that these terms are used in their correct sense and context, to avoid confusion.
Who should be subject to a counter-money laundering law
It is a constant source of amazement for this author that even now, well into the second decade of counter-money laundering laws, so many people in compliance and other financial services functions still think that laws to combat money laundering are aimed expressly and exclusively at their companies and fail to understand that there is also personal liability under the criminal law for themselves and their staff. It is equally amazing that so many people outside the financial sector are convinced that counter-money laundering laws do not apply to them. Finally, it is amazing that so many people who are on the blurred line as to whether the requirement to put in place risk management and compliance systems actually apply to them willingly jump to the "not me, guv" side of the fence.
Going back to the objectives of the law, it has the aim of making sure that those who commit crimes do not benefit from them and that those who would help criminals to benefit are also to be considered offenders.
In relation to being a money launderer, there must be no limitation on those who are liable under the law. It must therefore include citizens (in the UK, subjects) and all residents and visitors, and must include both natural and legal persons. In the case of companies, express liability should be placed on directors. This is already done through case law in several jurisdictions and, for example in Australia, via companies legislation.
That is, however, in relation to the offence of laundering per se, so that questions about the imposition and maintenance of risk management and compliance systems remain. That is a much more complex subject, largely because there is a difference between the generally adopted legal requirement and a broader risk management view.
To take an example from the mid-1990s, estate agencies were not included in the list of businesses that were required to implement the provisions of the UK's then-applicable Money Laundering Regulations, but there are very few estate agencies that do nothing other than act as property brokers. In many cases they also act as mortgage brokers and insurance brokers. When commentators said that estate agents were not subject to the regulations they were correct, but only insofar as estate agents offered none of the services that brought them within the scope of the (then in force) Financial Services Act 1986).
At that time, because of the specific way in which the UK's counter-money laundering laws were linked to the Financial Services Act, almost all law firms were brought within the catchment area. Many, including some partners at large London law firms, denied that they were bound by the Money Laundering Regulations and, incredibly, parts of the Law Society of England and Wales agreed (the regulatory and enforcement section with whom this author met on a number of occasions to discuss this area agreed with this author's view that there were very few law firms who would escape the need to comply, and that those that did would be tiny and operating in a very narrow niche).
Lawyers have, however, consistently looked for ways not to comply, even to the extent of trying to argue that only certain parts of the firm conducted the type of business that would result in a compliance obligation and therefore the remainder should be exempt. It is ironic that residential conveyancing departments often requested to be excluded, given that this is now one of very few areas that is expressly included in the list of activities of law firms that do require the creation of a risk management/compliance system. Under the most recent FATF 40 Recommendations and European directive, lawyers have been given a range of ways to avoid putting in place appropriate systems. This in turn has led accountants to argue that under EU law they deliver legal services and therefore should be subject to a regime of equivalent effect to lawyers.
There are two things at the heart of this issue. The first is the cost. This is not something that firms can ignore: risk management and compliance do not happen by osmosis. Even a sole practitioner with a secretary has to put in place systems that are, in principle, the same as those used by a 500 partner firm. There is also another devastating weapon, however: the question of confidentiality of dealings between lawyers (and, say accountants, them) and their clients.
The question of "privilege", as the secrecy between clients and their lawyers is known, is complicated. In general (but not in all jurisdictions) the privilege belongs to the client and the lawyer cannot waive it or avoid it. There are, however, two exceptions to that general rule: if the client commits a crime against the lawyer, then the lawyer may pass on such information as he thinks fit to aid in investigation; and if the lawyer thinks that the client is attempting to involve him in an illegal scheme, e.g., setting up a scheme to facilitate money laundering, then again information may be released.
"Privilege" is a very complex subject and there have been many cases in a wide range of jurisdictions, all of which have tended to conflict with the objectives of counter-money laundering laws. A European Court decision has, however, put the matter to rest, at least in Europe. That decision conflicts with the wording of the UK's Proceeds of Crime Act 2002 which, inexplicably, provided for the weakest interpretation (from an intelligence-gathering perspective, although it is the strongest from a client's perspective) of the concept.
Malaysia's Anti-Money Laundering Act takes exactly the opposite view, the same view as the European Court, and therefore enshrines in law that lawyers are bound to file suspicious transaction reports subject to legal professional privilege (that is, information and other material which comes into the hands of lawyers in the course of or in preparation for litigation, now often termed "litigation privilege") not "legal advice privilege" (all information and things coming into the hands of lawyers in the course of their retainer) which many courts (and the UK's PoCA) have adopted.
It is here argued that the application of legal advice privilege in relation to knowledge or suspicion of money laundering undermines the effectiveness of counter-money laundering laws and that a properly drafted law should limit privilege to legal professional privilege. For most purposes, "legal professional privilege" applies to lawyers and not to accountants or other professions merely because they advise on matters of law.
Part 1 of this article is here:
Part 2 of this article is here: Part 2
Part 3 of this article is here: art 3
Part 4 of this article is here:
Part 5 of this article is here: Part 5