The Proceeds of Crime Act: implications for the insurance industry

In an effort to clamp down on money laundering by trying to remove the benefit of criminal activity, the government introduced the Proceeds of Crime Act 2002 ("POCA"). Sections 327 to 340 came into force on 24th February 2003. The act was supplemented in March 2004 by the Money Laundering Regulations 2003, which define the regulated sector and the practical steps that regulated entities and individuals must take. The act and regulations have direct implications for those working in the insurance industry where large sums of money are exchanged on a daily basis and transactions often have a cross-border element. POCA creates a number of new criminal offences and the provisions of the act are drafted very broadly. Insurance brokers and intermediaries may find themselves caught by the provisions of POCA and, if breaches occur, will face sanctions such as fines or imprisonment. This article examines the implications of POCA and highlights some principal areas of concern.

POCA - the offences

POCA introduces new terminology, in particular "criminal property" and "criminal conduct".

Criminal Property

Under POCA it is an offence to:

• conceal, disguise, convert, transfer or remove criminal property (s.327);
• enter into or become concerned in an arrangement which (you) know or suspect facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person (s.328);
• acquire, use or have possession of criminal property without giving adequate consideration (s.329).

The second of these offences may cause the greatest concern because of the breadth of the language used.

Criminal Property

"Criminal property" is defined as property that is or represents a person's benefit from criminal conduct and which the alleged offender knows or suspects constitutes or represents a person's benefit from criminal conduct. The test for determining whether property is criminal property is two-fold: first, it must be a benefit from criminal conduct; second, the alleged offender must have knowledge or suspicion that this is the case. POCA imposes a subjective test whereby it would need to be established that the alleged offender knew or suspected that the property in question was a benefit obtained from criminal conduct. Suspicion is not defined in POCA although based on case law, it appears that a person may have a suspicion without any supporting proof or evidence for having that suspicion. The requirement for knowledge or suspicion means that the status of property may change and become criminal property depending on what is known or suspected at the relevant time.

Criminal Conduct

"Criminal conduct" is defined as conduct that constitutes an offence in the UK or would be an offence in the UK if it occurred here. Thus, conduct which is not an offence under the law of the relevant foreign country but is in the UK will be caught (e.g. bull fighting).

Consider a further example; a UK broker who accepts commission or premium payment from a non-UK insurer which is not correctly authorised in its own jurisdiction may have committed an offence under POCA. This is because it is an offence in the UK for an unauthorised insurer to operate here. If the UK broker knew or suspected that the insurer was unauthorised in its own country, then it is possible that they may be found guilty of an offence under s.328 (entering into an arrangement which facilitates the use/control of criminal property) and under s.330 failure to disclose a suspicion. If you know or suspect, or should reasonably know or suspect, in the course of business, that another person is engaged in activities that would constitute an offence in the UK if carried out here, failure to disclose that fact as soon as practicable is an offence.

POCA - the defences

So what should you do if you find yourself in receipt of funds or property that you know or suspect to be criminal property? There are a number of statutory defences available under POCA. In practice, it is likely that the most common defence will be the making of an "authorised disclosure" by providing details of the transaction to an "authorised person" and obtaining consent to the proposed transaction/arrangement. An authorised person is someone nominated by the Director General of the National Criminal Intelligence Service ("NICS") or a nominated officer within the discloser's own organisation who can liaise with NICS to obtain the necessary consent. Consent will be deemed if NICS does not respond within certain time limits.

The authorised disclosure and consent (or deemed consent) must be obtained prior to carrying out an act that would otherwise be prohibited under POCA. In the event that details are not disclosed and consent is not obtained, a defence may still be available if there is good reason for the delay. However, ignorance of the law and the requirements of POCA are unlikely to be considered a good reason for failing to make a disclosure.

There is also a defence to an offence under s.329 (acquiring, using or having possession of criminal property) if adequate consideration is given. The practical effects of this provision are examined in more detail below as they can result in some unexpected outcomes.

POCA - the practical effects

In order to illustrate some of the potential pitfalls of POCA, we set out some practical examples to show how the act may apply.

Example 1.

A UK broker is dealing with a foreign insurer who is not properly authorised to carry out insurance business in the country where it is based. Carrying on unauthorised insurance business is an offence under UK law and therefore falls within definition of criminal conduct set out in POCA. The UK broker suspects that the insurer is not authorised in their own country but fails to disclose this information as he is unaware that this would be a criminal offence. The broker accepts commission from the insurer. In so doing, would the broker be carrying out a prohibited act?

As stated above, it appears that the foreign insurer's actions may constitute criminal conduct, since the carrying of an insurance business without the requisite authorisation is a criminal offence under UK law.

Under s. 329 (acquiring, using or having possession of criminal property), it is possible that the broker could rely on the defence of giving adequate consideration for the commission as he has placed the insurance in return for the commission. However, if the broker tried to transfer or convert the commission (i.e. spend it) it would be necessary for him to make an authorised disclosure and obtain the appropriate consent in order to prevent this from being a prohibited act. In the event that he does not do this, the only remaining defence open to him is to show that there was good reason for the delay in making disclosure. As stated above, ignorance of the law or the provisions of POCA is unlikely to be considered a good reason.

Under the same circumstances, if the insurer made a payment to the broker in respect of a settlement, it is unlikely that the broker could rely on the consideration defence under s.329 because the broker would not itself have provided consideration for the settlement (the relevant consideration being the premium paid by the insured). Further, in the event that these funds were transferred to the insured, the broker would be committing a prohibited act under s.327 and/or s. 328. The only way in which these offences can be avoided, is if the broker makes an authorised disclosure and obtains the requisite consent (or deemed consent) immediately upon receipt of the funds and/or prior to dealing with the funds.

Example 2.

A large broking company employs a broker who, in the course of arranging reinsurance, makes a fraudulent representation to his principal that his employer will provide a guarantee regarding the reinsurer's solvency and it is on this basis that the principal commits to the contract. The broker retains the commission out of the premium, the balance of which is paid to the reinsurer. The broker also makes a payment out of the commission to a third party outside the jurisdiction. He represents to his employers that the third party has produced the business (this is false). Once the company discover the dishonesty of their employee, they wish to know whether they have fallen foul of POCA.

This example highlights the difficulty in deciding what constitutes criminal property. It is arguable that only the payment to the third party is criminal property as it is clearly a benefit obtained by criminal conduct (i.e. theft). However, in relation to the balance of the commission and the net premium, the position is not so clear; the wording of POCA appears to require there to be a causal connection between the criminal conduct and the obtaining of the benefit. In this example, it is arguable that the cause of obtaining the premium/commission was the reinsurance contract and that the fraudulent misrepresentation merely provides the occasion of the property being obtained. In view of the fact that the courts have not made any determination on this issue, the position is uncertain. Until such time as further guidance is available from the Courts, deciding what is or is not criminal property will sometimes be difficult.

Once the broking company has knowledge of their employee's dishonesty, they have satisfied the knowledge test set out under POCA. If, after discovering this state of affairs, the company transfers or converts the commission it may be carrying out a prohibited act under s. 327 and/or s. 329 (this will depend on the resolution of the question raised above as to whether the commission is criminal property). In this situation any defence based on the giving of consideration applies only to the s. 329 offence. Accordingly, in order for the broking company to protect itself, it would be necessary to make an authorised disclosure and obtain the appropriate consent. If there were a claim on the reinsurance contract after the company discovers its employee's dishonesty, the transfer of any loss payment may also be a prohibited act under s. 327 and/or s. 328 and accordingly the broking company would again need to make an authorised disclosure and obtain the appropriate consent before dealing with any such loss payment.

Example 3.

A foreign broker makes a payment to a UK broker of a lump sum, purportedly on account of premium and commission in respect of future transactions, but in fact in order to evade tax. What are the implications under POCA?

The indications are that tax evasion will be considered to be criminal conduct within the definition set out in POCA. The government has expressed the view that POCA does apply to tax evasion although the Courts have not yet formally considered the issue. The broker's receipt of the lump sum satisfies the first limb of the test for criminal property as it is property obtained by it as a result of or in connection with criminal conduct. However, the money will only become "criminal property" at the moment second limb of the test is satisfied, i.e. when the broker learns or suspects that the payment is part of a tax evasion scheme. From this point in time onwards any possession, use, transfer or conversion of the money will be prohibited. In order to protect its position, the broker must therefore make an authorised disclosure and obtain the appropriate consent prior to using the funds.

POCA - the conclusion

As demonstrated by the examples above, the provisions of POCA will catch insurance transactions where there has been some criminal conduct. Moreover, a failure to report suspicious circumstances may itself lead to liability under POCA.. The indications are that the POCA will give rise to future litigation and the issue of what will amount to knowledge or suspicion will inevitably be the subject of judicial scrutiny. Whilst a number of interest groups are currently lobbying the government to modify POCA to remove some of its more extreme consequences, for the time being it is on the statute books and enforceable by the Courts.

If in doubt about the provisions of POCA, then we recommend you seek guidance from your nominated officer or an "authorised person" immediately as the consequences of failing to comply can be serious.

For further information, please contact Lucie Spurr at lucie.spurr@cms-cmck.com or on +44 (0)20 7367 2164 or Liam O'Connell at liam.oconnell@cms-cmck.com or on +44(0)20 7367 2640

This article was prepared based on advice obtained from Tom Weitzman QC.