Advice and Information related to Rule B6: The Proceeds of Crime Act 2002 and civil litigation
The proceeds of crime act and civil litigation (Bowman v Fels)
This note looks at the case of Bowman v Fels decided by the Court of Appeal in England on 8 March 2005  EWCA Civ 226. This case overturns the decision of the High Court in P v P decided in 2003.
Proceeds of crime act
Before looking in detail at the Appeal Court's decision, it is necessary to look at the legislation in some detail to put the decision into context. The Proceeds of Crime Act 2002 (POCA) came fully into force on 1 March 2004. It is in 12 parts but the significant parts for Scottish solicitors are part 7 (Money Laundering) and part 8 (Investigations).
Part 7 creates a number of offences. In particular Section 327 creates the offence of concealing, disguising, converting or transferring criminal property or removing it from the United Kingdom. Section 328 creates the offence of entering into or becoming concerned in an arrangement in respect of criminal property and Section 329 creates the offence of acquiring, using or processing criminal property. Section 328 was the subject of the decisions in both Bowman v Fels and P v P. It should be noted however that there are other offences in part 7 - particularly the offence of failing to disclose that another person is engaged in money laundering. Under POCA there is a duty to report knowledge or suspicion - referred to in POCA as an authorised or a protected disclosure.
All of these offences clearly have implications for solicitors in general. Conveyancers have been in the front line for some time as one of the most common ways of converting "dirty" money into "clean" money is to invest it in heritable property.
Section 328(1) of POCA states, "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."
Criminal property is property constituting or representing a benefit from criminal conduct which the alleged offender knows or suspects, and criminal conduct is conduct which constitutes an offence in any part of the UK or would constitute an offence in the UK if it occurred here.
The only way to avoid such an offence is to make an authorised disclosure or to have a reasonable excuse for not doing so (not defined). Legal privilege is not specifically stated to be an exception.
P v P
P v P was a divorce action in which the wife's solicitors obtained a forensic accountants report on the husband's assets. This made them suspicious that part of his assets - which amounted in total to £19 million - was criminal property arising from tax evasion. The wife's solicitors were concerned that in acting for her in negotiating a settlement of the matrimonial property this might be regarded as becoming concerned in an arrangement falling foul of Section 328. Dame Butler-Sloss in the High Court held that the act of negotiating an arrangement amounts to being concerned in the arrangement and that the offence is not merely committed at the point of execution of the arrangement. She further held that solicitors have a duty to make a disclosure irrespective of the amount or value of the criminal property involved.
Section 328 provides that the offence of being concerned in an arrangement is not committed if the person make an authorised disclosure under Section 338 and in the form and manner prescribed in Section 339. The disclosure is authorised only upon satisfaction of one of the two conditions set out in Section 338 - namely that it is made either before the alleged defender does the prohibited act (of being concerned in the arrangement) or after having done it where there is good reason for failure to make the disclosure before doing so and the disclosure is made on the persons own initiative as soon as practicable for him to make it.
It was the subject of agreement in the case that the act of negotiating an arrangement did amount to being concerned in it, so that was not the subject of a contested argument. Dame Butler-Sloss held that there is nothing in Section 328 to prevent a solicitor taking instructions from a client but if having done so the solicitor knows or suspects that the client will become involved in an arrangement that might involve acquisition, retention, use or control of criminal property, an authorised disclosure should be made and the appropriate consent sought in order to proceed with it.
Bowman v Fels
This case was a claim by a cohabitee for a share of the value of the house the parties had lived in for 10 years before splitting up. The claimant's solicitors suspected that the other party had included the cost of work on the property in his business accounts and VAT returns even though the work was unconnected with his business. In the light of P v P they made a report to NCIS and obtained an adjournment of the trial without advising the defendants agents of the reasons. The defendants appealed. Before the Appeal was heard NCIS had given consent to proceed. The Appeal Court analysed the history of the European Directives and legislation on proceeds of crime. They observed that the definition of money laundering in POCA goes further than was required to comply with the relevant Directive, and in particular includes suspicion as well as knowledge.
They then considered whether Section 328 above applies to the conduct of legal proceedings, including settlement negotiations. The Court unanimously held that it does not, for both linguistic and policy reasons. On language they said "whatever Parliament may have had in mind by the phrase 'entering into or becomes concerned in an arrangement which…facilitates…' it is most unlikely that it was thinking of legal proceedings…. to describe a judgement or an order as an 'arrangement' is a most unnatural view of language… we see equally little basis in ordinary language for treating any step taken to issue or pursue legal proceedings… as 'an arrangement'".
On policy they said "access to legal advice on a private and confidential basis is also a fundamental principle not lightly to be interfered with". In their conclusion they said "Parliament cannot have intended that proceedings or steps taken by lawyers in order to determine or secure legal rights and remedies for their clients should involve them in 'becoming concerned in an arrangement which…. facilitates the acquisition, retention, use or control of criminal property'". They also held that as there was nothing express in the language of Section 328 which overturns legal professional privilege it could not be implied. They quoted Lord Hoffman in R v Secretary of State for Home Department Exp Simms  2AC115 "Fundamental rights can not be overridden by general….words".
Finally the Appeal Court considered negotiated settlements of legal proceedings and held that such negotiations are not an "arrangement" in terms of Section 328 either. They drew a distinction between negotiations in existing or contemplated legal proceedings and arrangements independent of litigation, which they felt did fall within the Directive and POCA.
Existing or contemplated legal proceedings
It is clear that there is a distinction under POCA between matters where there are existing or contemplated legal proceedings and other matters where there are no proceedings either in existence or in contemplation. Whether litigation is in existence is a matter of fact and should not give rise to a difficulty. That is not necessarily the case for contemplated proceedings. It would therefore be prudent to note in the file whether proceedings are in contemplation if that is not express in correspondence. Mere intimation of an accident claim for example may not amount to contemplated proceedings. The issue of a letter advising that if payment is not made within a time limit an action will be raised without further intimation would clearly demonstrate that proceedings are contemplated.
Confidentiality and professional privilege
Unlike Section 328, there is a specific exception in Section 330 of POCA and the Money Laundering Regulations where the information is privileged. It is now necessary to look at the related questions of confidentiality and privilege.
The Code of Conduct for Scottish solicitors describes confidentiality as a fundamental duty of solicitors. This has had to be amended to take the legislation to account. The traditional view is that solicitors should not disclose to any third party any matter connected with a client's affairs which is not already in the public domain unless required to do so by law or authorised to do so by the client. Professional privilege is a narrower definition. In both POCA and the Money Laundering Regulations it is information communicated by a client or his representative in connection with the giving of legal advice or in connection with legal proceedings or contemplated legal proceedings, but does not apply to information communicated with the intention of furthering a criminal purpose (including laundering money). In other words, if the client is using the solicitor unwittingly to assist the client in committing a crime, that is not subject to legal privilege. This is not new. The law was clearly stated by the late Lord President Emslie in Micosta v. Shetland Islands Council 1983 SLT 483, "The only circumstances in which the general Rule [of total confidentiality] will be superseded is where fraud or some other illegal act is alleged against a party and where his law agent has been directly concerned in the carrying out of the very transaction which is the subject matter of enquiry."
Section 333 creates the offence of tipping off where a person knows or suspects that a protected or authorised disclosure has been made and that person makes a different disclosure likely to prejudice any investigation which might be conducted.In addition, Section 342 makes it an offence for a person to make a disclosure likely to prejudice an investigation (a confiscation investigation, civil recovery investigation or a money laundering investigation).
A solicitor in either case commits no offence if it is a disclosure "(a) to a client or to a representative of a client .............. in connection with the giving........... of legal advice to the client, or (b) to any person in connection with legal proceedings or contemplated legal proceedings" but that does not include disclosures made "with the intention of further a criminal purpose" (see above).
This issue was also considered by the High Court in P v. P who held that unless the requisite improper intention is there (i.e. to further a criminal purpose) the solicitor should be free to communicate such information to his/her client or opponent as is necessary or appropriate in connection with the giving of legal advice or acting in connection with actual or contemplated legal proceedings. This can only be done after having made the authorised or protected disclosure. The High Court thought that it was appropriate for seven working days to pass before informing a client but that where appropriate consent is refused by NCIS and a 31-day moratorium is in place the solicitor and NCIS try and agree on the degree of information which can be disclosed during the moratorium period without harming the investigation.
The Terrorism Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations 2007
In amending the Proceeds of Crime Act 2002 and the Terrorism Act 2000 in 2007, the government had sought to remove the 'prejudice test' which would have unnecessarily constrained lawyers in giving legal advice to clients.
In the event the Amendments allow solicitors and others to discuss SARs where this is unlikely to prejudice investigations and the tipping off offence is restricted to apply only to regulated activities.
The amendments to the two acts were effective on 26 December 2007. If you are a solicitor who is not carrying on regulated sector work the tipping off offence may not apply to you.