Law Commission’s anti-money laundering approach may cause clash with Europe

David Hamilton, white-collar investigations expert at Pinsent Masons, said the suggested reforms, intended to strengthen oversight of corporate criminal liability in England and Wales, “may not sit easily with the Council of Europe’s assessment that the UK is failing to comply with international anti-money laundering (AML) standards.”

The Law Commission’s report (263 pages / 1.67MB PDF) suggested that ministers could reform the UK’s laws around corporate criminal liability with the introduction of new offences for failure to prevent fraud, human rights abuses, ill-treatment or neglect, and failure to prevent computer misuse – along with publicity orders requiring the corporate offender to publish details of its conviction.

But the Commission has been heavily criticised for not including proposals for the introduction of a new offence for failure to prevent money laundering. Margaret Hodge MP, chair of the All-Party Parliamentary Group on Anti-Corruption & Responsible Tax, labelled the report a “thundering disappointment” that “let the corrupt, the criminal and the enablers of economic crime off the hook”.

Hamilton said: “An animated debate has ignited over the question of whether and how the ‘failure to prevent’ model should apply to financial crimes beyond bribery, tax evasion facilitation, and - should the Commission’s proposals be adopted - fraud. The discussion regarding money laundering has been particularly interesting, since there are already stringent statutory and regulatory regimes in place under the 2002 Proceeds of Crime Act and the 2017 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLR2017).”

The MLR2017 regime requires a diverse range of ‘regulated sector’ businesses, such as banks, life insurance firms, estate and letting agents, accountants and casinos, to implement a broad range of reasonable, risk-based preventative AML controls. Breaches of the MLR2017 are criminal offences, although they tend to be dealt with on a civil basis.

“So, while some observers have criticised the Commission’s proposed reforms, others have argued that to impose a new ‘failure to prevent’ money laundering offence on such regulated sector businesses would be duplicative and would impose further compliance burdens on already heavily-regulated businesses,” Hamilton said.

He added: “That argument is not without merit, since the MLR2017 regime is demonstrably broader than the ‘failure to prevent’ model of corporate attribution. Under the MLR2017, for example, the prosecution would not need to establish the underlying money laundering offence but would simply need to point to gaps in the company’s AML procedures against those mandated by the MLR2017. Significantly the regulations already impose personal criminal liability on any officer found to have ‘consented to or connived’ in respect of a regulatory breach, or whose negligence caused a corporate offence. The Commission certainly appears to have been persuaded by this argument, proposing that any extension of the ‘failure to prevent’ model should be restricted to a narrow cadre of core fraud offences.”

Hamilton said that, despite the criticism, the Commission had “not shut the door” on reforming corporate liability for money laundering. “At the launch event for its latest report, it confirmed that it had decided to take an incremental approach to AML reform. In the Commission’s view, the initial focus on fraud will give legislators and law enforcement time to learn lessons before branching out to other forms of financial crime like money laundering,” he added.

But the Law Commission’s decision not to include a new offence for failure to prevent money laundering among its currently proposed reforms could draw criticism from the Council of Europe, Hamilton warned. Although no longer an EU member state, the UK remains a signatory to the 2005 Warsaw Convention which requires, among other things, that governments introduce domestic legislation that holds companies liable for criminal offences caused by a director’s “lack of supervision or control”.

Hamilton said: “An incremental approach to reform may not sit easily with the Council of Europe’s assessment in January 2022 that the UK is failing to comply with international AML standards.” The Council’s comments came several months after the deadline for the implementation of the sixth Money Laundering Directive (6MLD).

“Although the UK has not adopted 6MLD on the basis that its existing laws comply or go further than 6MLD’s provisions, the directive underscored the direction of legislative travel by extending criminal liability to ‘regulated sector’ businesses that fail to prevent a ‘directing mind’ within the company from carrying out money laundering,” Hamilton said.

He added: “Interestingly, the Council indicated in January that the UK government was looking to address its criticisms by introducing new money laundering laws. It appears, however, that the Commission’s proposals have kicked the issue into the long grass for now. It will be interesting to see the reaction.”

The Commission’s report also comes amid criticism from the Council of Europe and others, that the existing general rule for attributing liability to companies under English criminal law, known as the ‘identification principle’, shields large companies from taking responsibility for economic crimes committed in their names by senior managers.

The rule states that a company can only be held criminally liable for certain offences - including money laundering - if it can be proven that its ‘directing mind and will’ is guilty of the wrongdoing. In practice, this means proving that figures in the senior management, whose actions and omissions are treated as those of the company, are guilty. Critics have argued that this technicality makes it far easier to hold a small company to account for wrongdoing than a large business, where pinpointing responsibility for decision-making is more difficult.

The report’s suggested improvements included new rules attributing conduct to a corporation if a member of its senior management – including chief executive officers and chief financial officers - engaged in, consented to, or connived in the offence, and a new offence for failing to prevent fraud by an employee or agent. 

It also proposed a regime of administratively imposed financial penalties and civil actions in the High Court, based on Serious Crime Prevention Orders, with a power to impose financial penalties. Another option could see ministers introduce a reporting requirement for large corporations to disclose their anti-fraud procedures.