The New Money Laundering Offences and Longfirm Frauds 1 December 2005 12 years ago Under the old law, 'money laundering' offences - that is, hiding money derived from criminal activities into assets which appear to have a legitimate origin - were limited to the proceeds of drug trafficking, the proceeds of other criminal conduct and terrorist funds. The offence of money laundering was first criminalised in the UK in 1986 with the Drug Trafficking Offences Act. This act was later followed by the Criminal Justice Act 1988 to create separate offences relating to the proceeds of other criminal conduct. The Prevention of Terrorism (Temporary Provisions) Act 1989 was enacted to deal with terrorist funds. This was followed by the Drug Trafficking Act 1994, which created further drug money laundering offences. The prosecution had serious problems with the old system for example where there was evidence of money laundering but it was unclear whether this involved the proceeds of drug trafficking or the proceeds of other crimes, in which case the defendant could not be convicted. The Proceeds of Crime Act 2002 (POCA) is supposed to have updated and reformed the old law but in fact it has gone further than this, in reality creating a new series of money laundering offences (nb the money laundering provisions in the Terrorism Act 2000 are unaffected). The new offences offer the prosecution notable advantages over the old offences, thereby casting the prosecution net far wider than previously. These new offences do not differentiate between the proceeds of drug trafficking and the proceeds of other crimes. The POCA is applicable to offences committed after 24th February 2003 (for offences committed prior to this date the old law is still applicable). Money Laundering Transaction stages There are essentially 3 main stages in a money laundering transaction. 'Placement' is the first stage whereby the proceeds of criminal conduct start as cash. The money launderer will then have to ensure that this cash is transferred to some non-cash asset without suspicion being raised. Secondly comes the 'layering' stage, which involves putting a number of layers or transactions into place, the purpose being here to confuse and complicate the audit trail. The last stage is known as 'integration', where criminal money is invested in a bona fide investment providing a 'legitimate' income. The new offences Part 7 of POCA creates a series of new money laundering offences. The three main money laundering offences are found in ss.327-329 POCA. Concealing etc Under section 327, a person commits an offence if he conceals, disguises, converts, transfers or removes criminal property from the UK. Arrangements Section 328 provides that a person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person. Acquisition, use and possession Under section 329, a person commits an offence if he acquires, uses or has possession of criminal property. POCA 2002 is now a regular feature in any specialised criminal practice. The police have now set up special POCA units to investigate these new offences which are being pursued in a most proactive manner by the authorities. We anticipate defending in many more cases under this new Act. What this means in practice The term 'money laundering' is confusing. POCA covers not only money but all forms of property, real or personal, heritable or moveable; things in action and other intangible or incorporeal property (s.340). For example cars, houses or shares in a company bought with money obtained through criminal means. These offences are only committed where a person knows or suspects that the property is derived from his own or another person's proceeds from criminal conduct. The wording of is very broad, as a person could be charged with an offence even if he suspected that the property is criminal. For example, a car salesman who was happy to take cash for a vehicle assuming the purchaser was a respectable businessman but had a suspicion he might not be may find himself in the dock. Equally, closer to home under s.329 family members enjoying the fruits of any criminal activity might be charged under the new law. Take for example a wife who is given a few thousand pounds to go shopping with by her husband who is ostensibly unemployed. She might well be charged under the new Act if she even suspects it might be 'bent'. She need not be dishonest herself nor know the origins of the money. Indeed, under s.329, she need not actually spend the money as it is an offence under that section merely to have 'possession' of criminal property. We are still in the very early stages of the new law and as such have yet to see fully how the Crown Prosecution Service will use it to prosecute but it is anticipated by the authors that the families of those accused of grave crimes such as drug trafficking - effectively running a criminal 'business' - might well be targeted in an effort to put pressure on the main accused. This is nothing new. In criminal conspiracies the wife of a defendant is often charged to exert pressure on a defendant to plead on a basis that his wife was not involved in the conspiracy. Property for the purposes of the Act is defined as criminal property if it constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly) and the accused knows or suspects that it constitutes or represents such a benefit. Sentencing The maximum sentence for a person guilty under sections 327, 328 or 329 of POCA in the Crown Court is 14 years imprisonment. Offences under these sections can be tried in the Magistrates' Court for the most minor cases, but it is likely that the majority of indictments under the POCA will be tried in the Crown Court. Such offences are clearly most serious and your legal team will need to be well prepared from the outset. An expert forensic accountant may have to be instructed to possibly rebut prosecution allegations, particularly on larger-scale laundering charges involving one or multiple businesses. LONGFIRM FRAUDS In almost all frauds, there will be an element of false accounting, either to trick people into parting with money or other property or to cover up what has been done before. The 'Longfirm fraud' is: 'That class of swindlers who obtain goods by pretending to be in business at a certain place and ordering goods to be sent to them generally from persons at a distance without any intention of payment'. The essence of any business relationship is trust. The Longfirm fraud exploits the business relationship and abuses that trust. Essentially the fraud can be described as buying goods where the purchaser has no intention or has knowledge that he is unable to pay for them. A Longfirm fraud can arise in 3 different ways. First, a legitimate business enterprise gets into financial difficulty and the directors eventually exploit creditors to the point that they begin to act dishonestly. Second, a criminal gang will take over an established business operation and buy goods on credit, and then make off with the goods without payment. Thirdly, a gang will set up a false business or company and over a time build up trust and business relationships with suppliers. To begin with, they will make payments on time. Once full confidence is gained, they will put in a large order and make off with the proceeds without payment. Problems in prosecuting The difficulty in prosecuting Longfirm frauds is that they differ from other frauds in that there is no overt act of dishonesty. Ordering goods on credit and then being unable to pay for them is not in itself a crime. If it were, the criminal courts would be overflowing with prosecutions for unpaid debt. In many instances there is little evidence of any dishonesty when suppliers are scammed individually but a picture tends to emerge when the dealings with suppliers are considered together and a pattern forms. The prosecution would invite a jury to infer from such circumstances that a fraud was in play. The prosecution however in such circumstances is not without its problems because whatever the alleged fraudster is charged with - be it fraudulent trading, obtaining by deception, conspiracy - a jury would have to be persuaded that the defendant was dishonest and not just a bad businessman. Authors Zafar Ali is a specialist criminal defence Barrister at 23 Essex Street Chambers in London dealing with very serious crime. Aziz Rahman is a Solicitor- Advocate and Partner at the leading Criminal Defence firm Rahman Ravelli Solicitors, specialising in Human Rights, Financial Crime and Large Scale Conspiracies/Serious crime. Rahman Ravelli are members of the Specialist Fraud Panel.