Confiscation and money laundering — a system in need of repair

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Speed read: Jonathan Fisher QC comments on the deficiencies of the existing confiscation and money laundering regime and the work of the Law Commission in reforming these areas.

Technical issues concerning the application of the criminal confiscation regime in Part 2 of the Proceeds of Crime Act 2002 (‘POCA’) continue to occupy the time of the Court of Appeal and the Supreme Court. Meanwhile, the official figures obtained following freedom of information requests show that the collection rate of monies ordered to be confiscated by the criminal courts remains very low, with somewhere in the region of £1.9 billion outstanding. The figure may be inflated artificially by the courts making orders to confiscate ‘hidden assets’ which most probably do not exist, or multiple benefit figures in the case of co-defendants when there is a single benefit. However, even allowing for these distortions, the endeavour to separate criminals from their illicitly obtained monies is not working.

The story with money laundering is no different. The headline figures emerging from the Suspicious Activity Reports Annual Report 2017 published by the National Crime Agency show that in the period October 2015 to September 2016 there were 419,451 reports filed under Part 7 of POCA. Of these, 83.13% of these reports came from credit institutions (banks) and a meagre 0.12% from the real estate sector. However, the number of reports submitted by estate agents increased 44.79% from the 2014-2015 period. Of the reports filed between October 2015 to September 2016, where consent to proceed was refused, approximately £14 million was restrained, £16 million in cash seized, and 28 arrests recorded. This suggests that a cost – benefit analysis is urgently required since on the face of the figures the amount of sums restrained or seized, and the number of arrests, seems remarkably low.

A broader question relates to the proportionality of the anti-money laundering regime and whether the UK is out-of-line with its European counterparts. Totalling the suspicious activity reports submitted in European Union member States between 2006 and 2014, Europol has reported that of the 1.1. million reports submitted in 2014, 36% of the reports have come from the UK. This contrasts with 5% from Italy, 3% from France, 2% from Germany and 0.5% from Luxembourg. Europol raises the issue of whether the financial sector in the UK over-reports for defensive reasons. Echoing Europol Director, Rob Wainwright, the 1.1 million reports received during the period demonstrates not only the sheer number of resources, both in time and money, spent on sending, receiving and handling these reports but also the amount of activity in the regulated sector. However, in light of the fact that only a small number of these reports materialise into investigations or enforcement activity the question arises as to whether these resources are being misdirected. Alternatively, more resources may be needed to better scrutinize the 1.1 million reports.

The disparity in reporting levels across the EU members states may be telling of a more fundamental issue. Although governed at the supranational level, via 4MLD, the anti-money laundering regime is very much operated and implemented in the domestic setting. With the overall system only leading to 1% of criminal proceeds being confiscated its worth questioning whether the model currently used truly reflects the reality of an inherently international phenomenon. Does the answer lie in improved international cooperation and information exchange, in a singular specialist governing body to tackle global money laundering or somewhere in between?

On several occasions Select Committees in Parliament have reviewed the operation of the criminal confiscation regime and called for changes to be made. Some years ago, the House of Lords European Union Committee added its voice by suggesting changes to the width of the anti-money laundering reporting obligation, but the protestations were ignored. Now, the Law Commission is taking up the mantle. At the end of last year, the Law Commission announced in its Thirteenth Programme of Law Reform that it would be addressing both confiscation and money laundering aspects of the POCA.

In relation to confiscation, the Law Commission’s project will examine the entire regime, and strive to identify a more effective way of making confiscation orders and increasing the recovery rate. As the Law Commission notes, the law in this area is notoriously difficult to apply and enforce. They cite two principal causes. First, confiscation rules are excessively complex, and judges do not always have the necessary expertise and confidence in this area. In short, the state of the law in this area remains unclear. The Law Commission refers to National Audit Office statistics from December 2013 which estimate the total annual cost of court hearings and appeals on confiscation orders to be £31.8 million. Second, enforcement processes are inefficient and the lack of discretion afforded to enforcement bodies and courts when it comes to confiscation orders once made. As referenced at the beginning of this article, the system also struggles to collect monies paid under confiscation orders. The Law Commission’s task ahead is to propose a system of reforms that delivers a confiscation regime fit for purpose; namely to deprive criminals of their ill-gotten gains.

Early this year, the Home Office commissioned the Law Commission to analyse the functions of, and benefits and problems arising from, the reporting regime in POCA. The Law Commission acknowledges that the regime disproportionately affects businesses and is not optimal in preventing, detecting, and prosecuting money laundering. The expedited project, anticipated to be 9 months, will include consideration of the consent regime and will seek to optimise the detection of money laundering through effective reporting.

The outcome of the Law Commission’s work is eagerly awaited. The sooner the confiscation and money laundering provisions established by POCA are reformed, the better.

A version of this article appears in the Lloyd’s Law Reports: Financial Crime of which Jonathan Fisher QC is the General Editor.