The UK’s anti-money laundering (“AML”) regime, as set out in the Proceeds of Crime Act 2002 (“POCA”) and other legislation, requires regulated businesses, like banks, to cease dealing with and to freeze any criminal property (defined as a person’s benefit of criminal conduct1)they hold for a client. But what happens when the criminal property is only a fraction of the sums held in an account? Case law has led to the requirement that the whole account is frozen in those circumstances. This has led to obvious unfairness, and Parliament has finally stepped in to fix the problem, through the Economic Crime and Corporate Transparency Act 2023 (the “ECCTA 2023”).
Section 183 of the ECCTA 2023, entitled “Money laundering: exemptions for mixed-property transactions”, came into force on 15 January 2024.2
This provision amends the sections of POCA setting out the so-called principal money laundering offences3 to establish an exemption for regulated businesses that operate an account or hold funds for a client where they know or suspect that part but not all of that account’s funds (or property held) are criminal property. Where that is the case, the regulated business may conduct various transactions with the account or property, so long as after those transactions are concluded, the remaining funds in the account (or value of the property) is greater than the amount known or suspected to be criminal property. That is, “clean funds” can now be handled without the fear of a money-laundering prosecution.
In practical terms, the reform will mean that banks and other financial institutions can now ring-fence funds they suspect are criminal property while maintaining the client’s access to the balance of funds, and without being concerned about breaching POCA.
Up to now, there has been considerable uncertainty as to the status of legitimate funds when they are mixed with criminal property. The fungibility of money means that once illicit funds are paid into an account that holds otherwise legitimate funds, it becomes very difficult (if not empirically impossible) to distinguish between the criminal property and the wider account. Added to this, the Courts have interpreted the definition of criminal property under POCA as encompassing property that only partly derives from criminal conduct.
Most notably, in R v Causey (Wayne), the Court of Appeal considered the meaning of “proceeds of criminal conduct” in the Criminal Justice Act 1988, a precursor to POCA, and concluded that it was sufficiently broad to cover property obtained partly in connection with criminal conduct.4 The Court accepted the prosecution’s case that “if one penny or penny’s worth of the property dealt with is the proceeds of criminal conduct then the section is satisfied”.
Causey and subsequent cases cemented the proposition that the mixture of criminal monies with legitimate income renders the totality of funds criminal property. As a result, banks have tended to adopt a practice of freezing an entire account even where the suspicion or knowledge of criminal property relates only to a part of the account’s funds – sometimes an exceedingly small part. In tandem, as soon as that suspicion or knowledge arises,5 banks are required to disclose their suspicion or knowledge by filing a suspicious activity report (“SAR”) with the National Crime Agency (“NCA”) and, frequently, seeking consent to continue operating the account and/or to perform requested transactions. (Filing the SAR and seeking consent will also protect the bank from committing a principal money laundering offence under POCA.) However, unless and until such consent is obtained, the account will remain frozen.
For individuals and businesses whose entire accounts are frozen pending the provision of consent by the NCA to continue operating the account or to perform requested transactions, the economic consequences are potentially severe. This is especially the case where the NCA uses much or all the time available to it to determine whether to give consent. POCA provides that the NCA may give or withhold consent in an initial seven (business) day period, plus a moratorium period of 31 (calendar) days, and the moratorium can be extended by up to 186 days (though a court order is needed for each extension).6 During that period, the reporting bank is prohibited from carrying out any transaction in relation to the account (even, unfreezing a portion of funds to facilitate essential payments) whilst the NCA conducts its investigation and decides whether to take any account (such as obtaining an account freezing order). The economic harm resulting to frozen account holders, especially businesses, may be ruinous if they cannot access funds necessary to make payments under key contracts or service debts.
The freezing of client accounts for a protracted period, irrespective of the value of the suspected illicit funds relative to the overall account balance, also increases the risk of litigation for banks. Clients unable to access restricted funds have resorted to civil proceedings to unfreeze accounts and recover losses sustained following the bank’s decision to shutter the entire account. There is a long line of cases stretching over the last 20 years in which account holders have applied (largely unsuccessfully) to lift an account freeze imposed by their bank ostensibly to avoid being charged with a money laundering offence or suffering regulatory penalties (e.g., Harvey v Santander UK plc [2023] EWHC 2947 (KB)). Even if such efforts are ultimately unsuccessful, they embroil bank and customer alike in costly litigation.
The genesis for the amendment came from the Law Commission, which was concerned that the approach of the Courts was causing inconsistency between the criminal law’s approach to mixed funds and the principle applied in civil law (in particular civil recovery proceedings under Part 5 of POCA), that only funds derived from unlawful conduct are recoverable, regardless of whether they are mixed with legitimate income. This was thought to be unfair. But if banks are able to preserve funds equivalent to the value of the funds that are suspected to be criminal, rather than restricting the totality of funds, that would prevent unnecessary and unfair economic loss for customers while fulfilling POCA’s purpose of preventing dealing in criminal property.
As a result, the new section 183 of the ECCTA, amending sections 327, 328 and 329 of POCA, means that a bank that suspects criminal property is mixed with otherwise legitimate funds held for a client will not risk committing an offence if it isolates a sum equal to the value of the suspected criminal funds and continues to allow the client to transact with the legitimate funds. The bank will not need to rely on obtaining NCA consent to process transactions of the non-ringfenced funds. However, the bank will still be required to make a disclosure to the NCA of the sums suspected to be criminal property, regardless of whether it is seeking consent to deal with those funds.
Conclusion
The new exemption puts to rest the uncertainty that has beset this area of the AML regime for over two decades, and hopefully puts an end to the economic harm to individuals and businesses (including innocent third parties) shut out of their accounts, rendering them unable to meet their financial obligations. While certain unavoidable challenges of mixed funds will remain, such as the practical difficulty of identifying the amount to ringfence where the value of criminal property is not easily ascertainable, the reform is a welcome (albeit long overdue) development that should finally give banks the confidence required to adopt a more pragmatic approach to mixed property. Banks will probably move slowly to change their practices, and there may be some resulting litigation, but over time, the regime should become fairer to all.
1 Proceeds of Crimes Act 2002, s.340(3).
2 Economic Crime and Corporate Transparency Act 2023 (Commencement No. 1) Regulations 2023, Regulation 3(f).
3 Sections 327 (“Concealing etc”), 328 (“Arrangements”) and 329 (“Acquisition, use and possession”).
4 Unreported, 18 October 1999, [1999] 10 WLUK 542.
5 Indeed, once the reasonable grounds for the suspicion or knowledge arise (see POCA, s.330(2)).
6 Criminal Finances Act 2017, s.10(2) amended section 334 of POCA to enable extensions to the moratorium period of up to a maximum of 186 days.
This article was first published by Law360.
