In this issue
Welcome
Failure to Prevent Economic Crime to Become An Offence (This Time)
The SFO's Current Direction and Priorities
Market Abuse Regulation: The Key Changes
Clean Hands: Legal Audits
Corporate Criminal Liability: a changing landscape
Terrorism Financing: Institutions be warned!
R v Harvey - An opportunity to challenge historic confiscation orders?
A New Global Forum for Asset Recovery
New Edition of Blackstone's Guide to POCA 2002 published
Terrorism Financing: Institutions be warned!
 
David Hislop QC
David Hislop QC

by

David Hislop QC

The government through a patchwork of legislative measures has sought to curb terrorist financing, and legal advisers are increasingly being asked to assist real estate professonals, charities, politically exposed persons, and a whole host of others, on how they can minimise their risk of being unwittingly used to channel funds which are subsequently used to finance terrorism.  The challenge is to some extent far greater than curbing that other scourge of financial institutions - money laundering - as unlike money laundering at source the money is very often “clean” from legitimate activity and it is only when it reaches its destination it becomes tainted with the activity it supports. That it can start life as legitimate funds makes identification by financial institutions all the more onerous. This makes section 13 of the Terrorist Asset Freezing Act 2010 all the more concerning. Section 13 of the Act  provides for a criminal offence for individuals and financial institutions of frightening breadth.

 

 

Terrorist Asset Freezing Act 2010

 

Under section 2 of the Act HM Treasury's officials may make a final designation of a person if they reasonably believe that the person is or has been involved in terrorist activity, that the (legal) person is owned or controlled directly or indirectly by a person involved in terrorist activity or that the person is acting on behalf of or at the direction of such a person and the Treasury considers it is necessary for purposes connected with protecting members of the public from terrorism that financial restrictions should be applied in relation to the person. Terrorist activity is any one or more of the following—

 

(a) the commission, preparation or instigation of acts of terrorism;

 

(b) conduct that facilitates the commission, preparation or instigation of such acts, or that  is intended to do so;

 

(c) conduct that gives support or assistance to persons who are known or believed by the person concerned to be involved in conduct falling within paragraph (a) or (b) above

 

It is immaterial whether the acts of terrorism in question are specific acts of terrorism or acts of terrorism generally.

 

Terrorism has the same definition as under the Terrorism Act 2000:

 

1.— Terrorism: interpretation.

 

(1) In this Act “terrorism” means the use or threat of action where–

 

(a) the action falls within subsection (2),

 

(b) the use or threat is designed to influence the government [or an international govermental organisation] 1 or to intimidate the public or a section of the public, and

(c) the use or threat is made for the purpose of advancing a political, religious [, racial] 2 or ideological cause.

 

(2) Action falls within this subsection if it–

 

(a) involves serious violence against a person,

 

(b) involves serious damage to property,

 

(c) endangers a person's life, other than that of the person committing the action,

 

(d) creates a serious risk to the health or safety of the public or a section of the public, or

 

(e) is designed seriously to interfere with or seriously to disrupt an electronic system.

 

(3) The use or threat of action falling within subsection (2) which involves the use of firearms or explosives is terrorism whether or not subsection (1)(b) is satisfied.

 

(4) In this section–

 

(a) “action”includes action outside the United Kingdom,

 

(b) a reference to any person or to property is a reference to any person, or to property, wherever situated,

 

(c) a reference to the public includes a reference to the public of a country other than the United Kingdom, and

 

(d) “the government” means the government of the United Kingdom, of a part of the United Kingdom or of a country other than the United Kingdom.

 

(5) In this Act a reference to action taken for the purposes of terrorism includes a reference to action taken for the benefit of a proscribed organisation.

 

 

Warning

 

Financial restrictions include restrictions relating to economic resources. Where final designations are made by the Treasury, it is obliged to publicise the designation, subject to certain statutory exceptions. Accordingly, financial institutions and their compliance or other professionals must take steps to ensure they are regularly monitoring such publications.

 

Sections 11 to 15 of this Act contain prohibitions that set out the “can not do” for persons and financial institutions alike:

 

Section 11 freezing funds and economic resources

Section 12 making funds or financial services available to a designated person;

Section 13 making funds or financial services available for the benefit of a designated person;

Section 14 making economic resources available to designated persons.

Section 15 making economic resources available for the benefit of designated person.

 

The reach of these prohibitions can be illustrated by a consideration of the wording in section 11 of the Act:

 

11 Freezing of funds and economic resources

 

(1) A person (“P”) must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources.

 

(2) In subsection (1) “deal with” means—

 

(a) in relation to funds—

 

(i) use, alter, move, allow access to or transfer,

 

(ii) deal with the funds in any other way that would result in any change in volume, amount, location, ownership, possession, character or destination, or

 

(iii) make any other change that would enable use, including portfolio management;

(b) in relation to economic resources, exchange or use in exchange for funds, goods or services.

 

(3) Subsection (1) is subject to sections 16 and 17 (exceptions and licences).

 

(4) A person who contravenes the prohibition in subsection (1) commits an offence.

 

 

Financial institutions have the considerable burden of identifying who their customers might be. The prohibitions can be seen to become even more wide-ranging when one considers that they apply not only to a designated person (who it is likely is more readily identifiable) but someone acting for the benefit of such a designated person:

 

13 Making funds or financial services available for benefit of designated person

 

(1) A person (“P”) must not make funds or financial services available to any person for the benefit of a designated person if P knows, or has reasonable cause to suspect, that P is making the funds or financial services so available.

 

(2) For the purposes of this section—

 

(a) funds are made available for the benefit of a designated person only if that person thereby obtains, or is able to obtain, a significant financial benefit, and

 

(b) “financial benefit”includes the discharge of a financial obligation for which the designated person is wholly or partly responsible

 

(3) Subsection (1) is subject to sections 16 and 17 (exceptions and licences).

 

(4) A person who contravenes the prohibition in subsection (1) commits an offence.

 

Under section 18 of the Act a person commits an offence who intentionally participates in activities knowing that the object or effect of them is (whether directly or indirectly)—

 

(a) to circumvent any of the prohibitions in sections 11 to 15, or (b) to enable or facilitate the contravention of any such prohibition.

 

A person guilty of an offence under section 11, 12, 13, 14, 15 or 18 is liable (a) on conviction on indictment, to imprisonment for a term not exceeding seven years or to a fine or to both; (b) on summary conviction, to imprisonment for a term not exceeding the relevant maximum or to a fine not exceeding the statutory maximum or to both.

 

The Sting In the Tail

 

Thus far the offending would require knowledge in the form of “knows or has reasonable grounds to suspect”. But section 34 of the Act introduces culpability on the basis of neglect and this is the dangerous ground for institutions:

 

34  Liability of officers of body corporate etc.

 

(1) Where an offence under this Part committed by a body corporate—

 

(a) is committed with the consent or connivance of any director, manager, secretary or other similar officer of the body corporate, or any person who was purporting to act in any such capacity, or

 

(b) is attributable to any neglect on the part of any such person,

that person as well as the body corporate is guilty of the offence and is liable to be proceeded against and punished accordingly.

 

(2) In subsection (1) “director”, in relation to a body corporate whose affairs are managed by its members, means a member of the body corporate.

 

(3) Subsection (1) also applies in relation to a body that is not a body corporate, with the substitution for the reference to a director of the body of a reference—

 

(a) in the case of a partnership, to a partner;

 

(b) in the case of an unincorporated body other than a partnership—

 

(i) where the body's affairs are managed by its members, to a member of the body;

 

(ii) in any other case, to a member of the governing body.

 

 

In summary, what this means is if you are part of a management team at a financial institution and you have a rogue banker or other employee who undertakes or assists in one of the prohibitions - the “can not do's” - and you can be shown to have neglected to adopt measures that might assist to identify or the offender or to prevent such offending behaviour, you personally risk being criminally liable.  Is that worth the risk of not taking proper preventative advice?

David Hislop QC

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