Charities and internal investigations
On 2 December 2020, the National Economic Crime Centre (‘NECC’) published an alert on money laundering risks faced by Independent Schools, a number of which hold charitable status. The NECC Director General also highlighted the risk of wealthy individuals attempting to secure their children’s places at schools through “corruption or other forms of serious crime”.
Money launderers will look for any opportunity to take advantage of organisations with weak financial controls in order to launder their ill-gotten gains. Charities, trustees, employees and volunteers who knowingly or unwittingly assist money launderers, or who fail to report suspicions, may commit a criminal offence and find themselves liable to prosecution.
So, with criminals looking for ever more sophisticated and creative ways to launder the proceeds of criminal activity, the charity sector and its advisors ought to be fully aware of the relevant legislation and obligations on them when it comes to money laundering. The penalties for getting it wrong can be harsh and include prison sentences of up to 14 years.
Money laundering can be defined as the process by which the proceeds of criminal conduct are dealt with in a way that disguises their origin. Money laundering offences can be committed by anyone coming into contact with the proceeds of a crime. The anti-money laundering (‘AML)’ legislation is contained in the Proceeds of Crime Act 2002 (‘POCA’) and the Money Laundering Regulations 2017 (‘MLR17’). Between them they create a number of criminal offences.
POCA applies to everyone, not just those in the financial world. It makes it a criminal offence to acquire or deal with, or arrange for another to acquire or deal with, the proceeds of criminal conduct or “criminal property”. Criminal conduct is any crime contrary to UK law, however trifling, regardless of where in the world it was committed and irrespective of how long ago. Importantly, property is only criminal property for the purposes of money laundering if a person knows or suspects it is the proceeds of criminal conduct. This element therefore protects the unwitting who may be, for example, engaged in converting property which is in fact the proceeds of criminal conduct about which they had no knowledge or suspicion. However, suspicion is a very low bar for any individual to reach before criminal liability might be engaged. So, what is suspicion based on? It can be based on general indications of wrongdoing or so-called “red flags” or warning signs. Any individual considering the question of suspicion should consider as a whole all the relevant information known to them.
MLR17 apply to those who are in the regulated sector, which is defined in the MLR17, but which are generally those businesses (which will include some charities) that are open to a higher risk of money laundering. The MLR17 create a raft of additional offences, including failing to disclose suspected money laundering, tipping off and prejudicing an investigation.
The National Crime Agency (‘NCA’) is the law enforcement agency at the forefront of tackling money laundering. It can conduct criminal and civil investigations to discover if a person holds criminal property and to recover that property. It has a raft of powers – the newest of which are account freezing orders over bank accounts which are easy to obtain, very effective and very disruptive.
There are a number of ways in which money launderers may seek to exploit charities for their own benefit.
The Charity Commission for England and Wales (‘CCEW’) is responsible for regulating charities in England and Wales. The CCEW Guidance for Charity Trustees sets out their obligations. These include managing the charity’s resources responsibly. The guidance, at chapter 7.1 states:
Some charities work in areas or undertake activities which involve greater exposure to risks such as fraud, financial crime, extremism or terrorism. Charities should assess their exposure to these risks and take proportionate action. If your Charity needs to address these risks, you should find the Commission’s Tool Kit on protecting charities from harm helpful. Chapter 2 of the Tool Kit includes a practical guidance to due diligence, based on three principles:
The guidance also makes plain that trustees should protect the charity from financial crime and tell the police or the CCEW if something goes wrong.
More detailed CCEW guidance entitled Due Diligence, Monitoring and Verifying the end use of Charitable Funds sets out that a significant aspect of a trustee’s legal duty to protect charitable assets and to do so with care, means carrying out proper due diligence on those that give money to the charity. The Executive Summary makes plain that charitable status imposes upon its trustees the obligation to put certain AML policies, controls and procedures in place, even if not caught by the MLR17.
Further, CCEW guidance on fraud and financial crime reinforces the point and also states:
Legal requirement: If you discover that potential money laundering offences are taking place in connection with your Charity, you must report it to the Police immediately. You must also report it to the Commission.”
“Exempt” charities are also required to comply with charity law and many of the charity’s legal obligations are the same, irrespective of whether it is registered or exempt. Hence it is clear that charitable status in whatever form entails certain AML obligations and a duty to report certain matters to the Authorities and Regulators.
Strong financial controls, good management and governance are expected of trustees by the CCEW, to reduce the risk of their charity being used as a vehicle for money laundering. Trustees must be wary not to make omissions (i.e. a failure to act) and must also take active steps to prevent financial crime and money laundering. They must not allow misuse of funds to occur because of lack of oversight or control and they must also actively tackle any suspected financial crime and abuse of funds
So, trustees are urged by the CCEW to carry out risk-based assurance and due diligence checks on individuals and organisations that give money to, and receive money from, their charity. Trustees need to ensure that there are appropriate internal procedures in place to encourage staff and volunteers to report known or suspected financial crime or abuse. Information on how to report concerns should be provided along with a clear explanation about how such reports will be investigated. Adequate training should be provided to staff and volunteers to ensure that they are familiar with the charity’s reporting procedures and financial controls, and know what actions to take if they suspect criminal financial abuse.
This is a complicated area and it is easy to get onto the wrong side of the law. The penalties are harsh, with sentencing for the various offences ranging from five years’ up to 14 years’ imprisonment. The take away is that charities are caught by the AML regime. But whilst it may appear daunting, this is something that affects pretty much every area of business now and the prevention of money laundering has to be part of the everyday culture of an organisation. Money launderers are sophisticated and you won’t always get it right, but an effective, risk-based approach, and documented risk-based judgments on individual situations will enable you to justify your position whatever you should do.
Nicola Finnerty is a Partner in the Criminal Litigation Department of Kingsley Napley.
Thomas Surr is the Head Paralegal in the Criminal Litigation Department of Kingsley Napley.
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