Speed Read: Directive (EU) 2108/1673 on combating money laundering by criminal law is now in force. It follows soon after the adoption of the Fifth Money Laundering Directive (5MLD).
Whereas the UK government confirmed that it will transpose 5MLD into domestic law, it declined to do so for the most recent directive. As Brexit approaches, the UK government declined to “opt in” – exercising a concession to the Lisbon Treaty secured by the UK where EU measures relate to “freedom, justice or security”. When declining to opt-in, the government reported to Parliament that the UK is already “largely compliant” with the Directive’s measures in any event. This post asks whether the UK government has made the correct decision, particularly in relation to corporate liability.
What does the new EU Directive require?
The Directive (EU) 2018/1673 on combating money laundering by criminal law was adopted by the Council of Europe on 23 October 2018. The deadline for transposition into domestic law is 3 December 2020.
This most recent EU directive on money laundering establishes minimum standards for offences and penalties. It is motivated by a desire to provide greater coherence to Member States’ anti-money laundering provisions, in order to facilitate cooperation in cross-border cases.
The Directive follows much of the Council of Europe’s Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism of 2005, CETS No 198 ("the Warsaw Convention"), as well as relevant recommendations from the Financial Action Task Force (FATF), but it goes further in some respects.
We would suggest that the following points are especially noteworthy.
Predicate offences (Article 2)
- The Directive specifically identifies 22 categories of predicate offence (“criminal activity”), the proceeds from which must be deemed unlawful. These 22 offences essentially follow FATF’s Recommendation 3 and the Warsaw Convention, with the addition of cybercrime.
- Significantly, the definition of “criminal activity” further includes any offence for which a sentence of more than six months imprisonment would apply.
- This new approach to predicate offences should make it much easier for Member States to cooperate with each other when they need to identify criminal property for the purpose of co-ordinating enforcement action.
Money laundering offences (Article 3)
- There are no surprises here, with Members States required to ensure that the conversion, concealment or acquisition of criminal property are all punishable as criminal offences.
- The minimum requirement for an offence to be established refers to the offence stemming from a person’s knowledge that property derives from criminal activity. As with earlier anti-money laundering directives, however, knowledge may be inferred from the objective surrounding circumstances.
- The Directive further states that Member States “may” criminalise conduct where the offender “suspected or ought to have known” the property’s criminal origin.
- Members States must provide for a margin of leeway when proving money laundering offences. It is not necessary to identify a prior or simultaneous criminal conviction from which the property derived; or to prove every element of the underlying offence (including the perpetrator’s identity).
Liability of legal persons (Articles 7-8)
- The biggest twist comes in relation to the liability of legal persons. Whereas the thrust of the Directive relates to the criminal law, the provision on legal persons (Article 7) is arguably broader; and the provision identifying sanctions (Article 8) refers to “criminal or non-criminal fines” among other (optional) penalties.
- This is a significant point because some EU Member States, including Germany, do not currently provide for corporate criminal liability. It nevertheless seems clear that the direction of travel across the EU is towards criminal liability for legal persons.
- Twists aside, the Directive sets out a prescriptive basis on which a legal person must be held liable for money laundering offences committed “for their benefit”. The underlying conduct can be committed by “any person” acting “either individually or as part of an organ of the legal person and having a leading position within the legal person”, such persons to be identified based on either: (a) a power of representation of the legal person; an authority to take decisions on behalf of the legal persons; (c) an authority to exercise control within the legal persons. For convenience, we use the term “relevant persons”.
- The Directive includes a “failure to prevent” basis for corporate liability, where a “lack of supervision or control” by (our term) “relevant persons” within the legal person made possible the commission of the money laundering offence(s).
Penalties for natural persons: a minimum to the maximum
- The provision on penalties is strangely worded. It appears to be directed towards the 22 enumerated predicate offences. It then requires Members States to ensure that those offences are “punishable by a maximum term of imprisonment of at least four years”.
- The Directive is therefore saying, albeit in a convoluted way, that courts must have the power to sentence offenders to four years or more (i.e. for more serious forms of money laundering).
Restriction to double criminality requirements
- With six specific exceptions, if the relevant conduct took place in another country then Member States can require both: (1) that the conduct constitutes an offence abroad; and (2) had the conduct occurred at home, that it would also have been a domestic offence under domestic law (Article 3(4)).
- The six exceptions (listed in Article 2(a)-(e) and (f)), where no such double criminality requirement may be required, are as follows:
- Participation in an organised criminal group and racketeering;
- Trafficking in human beings and migrant smuggling;
- Sexual exploitation (including of children);
- Illicit trafficking in narcotics and psychotropic substances;
Aggravating circumstances (Article 6)
- Particular forms of money laundering are specified to be aggravated, thus deserving of heftier punishments. They include money laundering involving either criminal organisations or an “obliged entity” in the course of professional activities (i.e. the regulated sector).
- Further aggravating circumstances “may” (not must) include whether the laundered property is of considerable value or it was one of the six predicate offences identified above to which no double criminality requirement may be required.
The UK’s position
None of the above applies to the UK (or Ireland).
Recital (23) of the Directive records the UK’s opt-out from measures related to “freedom, security and justice”.
It would have been possible for the UK to “opt-in” to the Directive, but the Government declined to do so on the following basis:
the UK’s domestic legislation is already largely compliant with the Directive’s measures, and in relation to the offences and sentences set out in the Directive, the UK already goes much further. Therefore, the Government decided not to opt in as we did not consider that opting in would enhance the UK approach to tackling money laundering.
The notable caveat “largely” before “compliant” raises obvious questions.
It is true that the UK goes further in some of the areas covered by the Directive. For example, UK maximum sentences are 14 years for the three primary money laundering offences and five years for the ancillary offences of tipping off and failure to disclose. The UK takes an “all crimes” approach to predicate offences; and UK money laundering offences can be committed based on suspicion alone.
It would be overstating matters, however, to suggest that the UK is compliant with the Directive’s provisions on the liability of legal persons.
The debate around the UK’s “identification principle” is well-worn, but increasingly pressing. Both the Law Society and Transparency International use the term “difficult” when referring to the identification doctrine and the prosecution of legal persons. The Law Commission has suggested the possibility of introducing a corporate criminal offence for the failure to report money laundering suspicions by stating that “if a failure to prevent model was used in the context of money laundering, a commercial organisation whose associates failed to report suspicions of criminal property could be held criminally liable.”
The EU Directive’s provisions on the liability of legal persons would, if they applied to the UK, require corporate criminal liability in this country to be reworked. Moreover, the provision on liability flowing from a “lack of supervision or control” would probably demand an extension to the UK’s current failure to prevent model for corporate criminal liability.
At a time when UK policy-makers are examining economic crime more broadly, some may think that the decision to opt-out of this most-recent EU Directive is a missed opportunity.