Tipping the Scales

Posted on December 16, 2020

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A recent Isle of Man High Court judgment should be a must read for those in compliance. It showed how complying with local anti-money laundering legislation can create tricky and unforeseen situations which even the Court finds difficult to resolve.

In the finance sector, how best to apply the law when “on-boarding” clients and when servicing the continuing relationship keeps many an MLRO awake at night. This is evident from the recently decided Manx case of P Ltd and Q Ltd v R Ltd.

Background

The case concerned how best to apply two very important conflicting ideals. On the one hand the need to give parties involved in litigation what was described as a “fair and public hearing” and on the other the need to protect parties from the possibility that the offence of tipping off will be occasioned. Tipping off is a criminal offence in many jurisdictions and essentially its aim is to prevent someone telling a person who may be the subject of an investigation into money laundering that they are, or may be, being investigated. In the context of this case however the precise wording of the legislation, and changes made to it is important.

Prior to December 2019, s145 Proceeds of Crime Act (“POCA”) (Act of Tynwald) read (in part) as to tipping off:

(3) A person commits an offence if —

(a) the person discloses that an investigation into allegations that an offence under this Part has been committed, is being contemplated or is being carried out; (b) the disclosure is likely to prejudice that investigation; and

(c) the information on which the disclosure is based came to the person in the course of a business in the regulated sector.

The relevant part of section 145 of POCA now reads:

(3) A person commits an offence if the person discloses that an investigation into allegations that an offence under this Part has been committed, is being contemplated or is being carried out.

(3A) To avoid doubt, an offence is committed under subsection… (3) whether or not the person’s actions result in prejudice to an investigation.

The case

In the case in hand (and simplifying somewhat), the defendant had been served with a Norwich Pharmacal Order (“NPO”), requiring it to release information about a third party and as is usual, the applicant in respect of the NPO was liable to pay the costs of the Defendant in complying with the order. In complying with the NPO, the Defendant felt compelled to make a “money laundering” report as a result of which it applied to the court for directions as to its obligations to disclose that report under the NPO as to do so, it claimed, would constitute tipping off.

At a previous hearing, the Manx Court had been content to follow English guidance as to the offence of tipping off which was per CvS [1999] 2 All ER 343. In that case, Lord Woolf MR said this at paragraph 347 b-d:-

"The fact that the statutory provisions make it an offence to tip-off in the specified circumstances provides considerable, but not unqualified, protection of investigations into money laundering from the adverse consequences of orders of the court which could interfere with the investigation. The court will not make an order, which it would otherwise make, if it would result in a person being required to commit a criminal offence: see Rowell v Pratt [1937] 3 All ER 660 at 663, [1938] AC 101 at 106 per Lord Wright. However, courts are required to protect the interests of litigants who find themselves in a similar position to that which exists here. They are, therefore, entitled to satisfy themselves that an offence will be likely to be committed if disclosure were to be made before refusing an order for disclosure. In addition, they will want to explore the possibility of reconciling the position of the party to the litigation seeking the assistance of the court and the investigating authority by making a more restricted order for disclosure than would otherwise be made."

The solution

However, that was before the amendment introducing section 145(3A) POCA (see above). By that amendment the requirement for the disclosure to prejudice an investigation has been removed such that it is now an offence regardless of whether prejudice is caused. This is different to the position under equivalent provisions in English legislation and so the helpful guidance in C v S is no longer relevant. The Court here was faced with making the best of a bad job and rose to the occasion, mindful of the need to balance the need for open justice with the desire to apply the strict prohibition on disclosing the fact of a money laundering investigation. Deemster Corlett, First Deemster and Clerk of the Rolls said:

“…one way to deal with the issue is for the relevant order [as to disclosure] to be served on the party affected to refer to the court having been satisfied by reference to the evidence filed and legal submissions made that there exists a statutory prohibition on disclosure (without necessarily disclosing precisely what that prohibition is) but that the order should be served on any entity affected by it and that the order must bear the wording required by Rule 7.11(3), thereby alerting those served of their right to apply to discharge or vary the order.”

“Consideration ought also be given to the evidence supplied to the court and upon which it has relied being set out in a confidential schedule to the order, which schedule would be redacted for the purposes of service. Whether any party so served would be in a position effectively to participate in any useful way and to challenge an order so modified of the nature made in this case must be open to doubt, bearing in mind the treacherous statutory framework. Nevertheless, I agree … that in the event that any similar such cases arise in the future, consideration needs to be given to alerting promptly persons affected of the fact that an order has been made and that they have the ability to participate, in so far as they are legally able, in a process of challenging the legitimacy of such an order.”

This balancing act which the Manx Court achieved serves as a warning to those who seek similar relief, and especially those not familiar with the peculiarities of the law within the Isle of Man and who might otherwise consider that such anti-money laundering legislation is a “one size fits all” across all jurisdictions. Careful thought must be given before embarking on similar ventures before the Manx Court.

Damian Molyneux is a director of M&P Legal with experience of compliance work and enforcement

Disclaimer: Note specific advice should be sought on each case, this article does not give advice

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