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COPYRIGHT 2002 Berkeley Electronic Press
University of Paris I
Abstract
With the rise of organised crime, money laundering has become a priority issue both at the national and international levels. In 2001, the OECD issued a report showing that trusts could be the instrument of money launderers. If trusts are usually used for perfectly legal operations, their advantages such as privacy may lead criminals to try and misuse them. But this area of the law has so far remained relatively unexplored and commentators have pointed out that a comprehensive examination of how trusts can be abused has never been carried out. The purpose of this research is admittedly narrower. It rather aims at identifying the possible conflicts between English anti-money laundering legislation and some of the traditional obligations of trustees, namely the duty of confidentiality and the duty to account. For the purpose of combating money laundering, ss. 93A and 93B of the Criminal Justice Act 1988 seem to have abrogated the duty of confidentiality owed by professionals to their clients/customers. These provisions even confer an immunity against actions for breach of confidence. Despite the fact that confidentiality is essential in a trust context, the scope of this immunity remains unclear. The trustees' position is all the more awkward since s. 93D will hold them liable if they disclose information which is likely to prejudice a police investigation in relation to money laundering. Beneficiaries, using their right to information, could possibly make trustees `tip off'. At the end of the day, the sacrifices that trustees have to accept may not even be rewarded by the courts: the recent case of Bank of Scotland v. A Ltd demonstrates how trustees could be faced with the dilemma of violating either s. 93A or s. 93D. This decision illustrates one of several flaws in the UK anti-money laundering system.
Introduction
1. The issue of money-laundering features high on the international and domestic political agendas. This is partly linked to the increasing concern which the development and prosperity of organised crime is raising. In the 2001 "United Kingdom Threat Assessment" (1), the National Criminal Intelligence Service (NCIS) indicated that the overall turnover of known organised crime groups (OGCs) appeared to be more than 8 billion [pounds sterling] and that the true figure could be much higher. In the United Kingdom and particularly in England, recent events have reinforced the awareness of the need to take tough action against the phenomenon of money laundering.
2. In September 2000 the Financial Services Authority (hereinafter FSA) (2) launched an investigation into the handling of accounts linked to the General Sani Abacha, the former President of Nigeria, by banks in the UK. The late dictator was indeed alleged by the Nigerian government to have looted 3 billion [pounds sterling] from the country between 1993 and 1998(3). This money, which was the product of corrupt payments and direct transfers from the Nigerian Central Bank, found its way to Switzerland, France, Luxembourg, Liechtenstein and the UK (in London). The FSA's investigation focused on the anti-money controls in UK-based banks which had handled accounts linked to General Abacha. In March 2001, the publication of the findings revealed the existence of 42 personal and corporate accounts linked to Abacha family members and close associates in the UK. 23 banks, which included UK banks and branches of banks from both inside and outside the EU, were identified as holding such accounts. The total turnover on those accounts represented US$1.3 billion for a four year period between 1996 and 2000 (4). About 98% of this US$1.3 billion went through 15 banks with significant control deficiencies. 8 banks had corrected their weaknesses since the accounts were opened but the remaining 7 were given strict deadlines to correct these weaknesses (5). The Sunday Business (6) also reported that the Deputy Director of the Central Bank of Nigeria used a London trust fund to launder money. This allegation was made, and documents found, at the Colorado District Court of Denver after a Colorado firm sued the Nigerian Central Bank and the Republic of Nigeria for loss by fraud of more than US$700,000. The Nigerian defendants were also accused of using similar trusts in order to defraud other US citizens.
3. The so-called Abacha case, which involved well-known financial institutions (7), received extensive coverage from the press and largely contributed to focus attention on the issue of money laundering in the UK. The September 11th terrorist attack strongly reinforced this trend, tragically reminding governments of the necessity to counter illicit funds transfers. In this context, the release of the information report of the French National Assembly on the laundering of capitals in Great Britain was not particularly welcome (8). The report depicts the City as a money laundering haven and also discloses that up to 40 companies, banks and individuals based in Britain can legitimately be suspected of maintaining direct or indirect relations with Osama Bin Laden (9). A committee of MPs used this document to back its criticisms of Howard Davies, chairman of the FSA, and his action to tackle money laundering. But others thought that the report was less valuable than its authors would hold it out to be: "[t]he statement made by Arnaud Montebourg, a French left-wing MP, on 10th October 2001 was probably the most stupid statement ever made by a French politician. It is not difficult to say about what he was pronouncing: he denounced the City of London and its institutions for deficiencies in connection with anti-money laundering and other financial crimes. His 400-page document was dismissed by the UK Treasury as an attempt by the author to raise his own profile. In other words, he is recognised as a show-off" (10). These recent events have thus shown that the relationship between money laundering and trusts is not so easily explored as the topic does seem to be politically sensitive.
4. One ought to start with a definition of money-laundering. It may be described as "the process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities" (11) in order to make them appear legitimate. One of the incentives to indulge in criminal activity undeniably lies in the ability to render "the proceeds of crime unrecognizable as such" (12), "the ultimate goal of any money laundering operation [being] twofold: to conceal the predicate offences from which these proceeds are derived and to ensure that the criminals can enjoy their proceeds, by consuming or investing them in the legal economy" (13).
There is not just one method of laundering money. Techniques may range from the purchase and resale of real estate or of a luxury item to injecting money through a complex web of legitimate businesses, 'shell' companies or trusts. Nevertheless, one usually identifies three stages in the money laundering process. The first stage is that of placement. The cash proceeds derived from the illegal activity are placed, often but not necessarily, in a financial institution. Then, during the second stage, criminals attempt to separate the illicit proceeds from their source, to disguise the "paper trail", by creating various layers of financial transactions. This is called layering. The final stage aims at integrating the proceeds of crime into the legitimate economy and thus to give them the appearance of normal business funds.
These three basic phases do not always occur as distinct stages; they often overlap. But, as far as they can be separated, the placement stage proves to be the defining moment.
5. Everyone agrees that combating this noxious phenomenon is vital in more than one way. The immediate and perhaps most obvious reason for fighting money laundering would be to enable the law enforcement authorities to confiscate the proceeds of the predicate criminal acts. A second reason derives from the evidential difficulties usually preventing the conviction of top or high-level criminals who are mostly not directly involved in criminal activities but who do benefit from, or lay their hands on, the proceeds of these illegal activities. More generally, "unchecked laundering may engender contempt for the law, thereby undermining public confidence in the legal system and in the financial system, which in turn promotes economic crime such as fraud, exchange control violations and tax evasion" (14). Freedom to launder money erodes the credibility of individual financial institutions and ultimately the integrity of the whole financial system: as money laundering operations necessarily imply at some point or another contact with institutions from the legitimate economy, they increase the risk of corruption and deter honest investors from ploughing capital into a system which they see as insecure. Economic growth and the proper functioning of a healthy financial system are closely linked, and nowadays evermore interdependent (15). Unchecked use of the financial system for money-laundering purposes could therefore have adverse macroeconomic effects and disrupt the efficient allocation of resources: money launderers will tend to move proceeds of crime from jurisdictions with high standards of regulation to countries implementing poorer economic policies but lower standards of regulation. Moreover, loss of confidence in the financial system creates instability in the economy as a whole, both at the national and international levels. The increasing internationalisation of the legitimate economy allows money launderers to carry out operations on an international scale, taking advantage of the instantaneous payment systems and the liberalisation of exchange controls. These last two factors do contribute positively to the growth of the world economy but also create opportunities for criminals whose operations often have an international dimension and are thus monitored with greater difficulty.
6. An idea of the economic volume which 'dirty money' represents should strengthen the will to struggle against, and eradicate, money laundering. According to the former IMF Managing Director Michel Camdessus, laundered money would make up 2 to 5 per cent of the world's GDP, namely US$ 600 billion at the lowest estimate (16). Other sources estimate that "100 billion [pounds sterling] of criminal money is washed through London each year--of this frightening amount confiscation orders rarely total more than 30 million [pounds sterling] per year and actual recoveries hover around 10 million [pounds sterling]" (17). However such figures should be read with caution: they can be but guesstimates and therefore uncertain for it is simply impossible to determine and measure the volume of proceeds which criminals derive from illicit activities. This in turn makes it difficult to assess the performance of the various anti money-laundering devices (18).
7. With the assessment obstacle in mind, the OECD (19) recently issued a report (20) showing inter alia how trusts could become the instrument of money launderers. While one of the primary purposes of the organisation was to explain, and seek ways to prevent, the misuse of trusts, the report (and several authors) (21) make it clear that trusts are essentially valuable tools which private persons and financial institutions choose for perfectly legal operations (22). In fact, trusts, which have long been used in the context of family settlements, are increasingly employed with great success in high-scale commercial or financial transactions. "Trusts are quickly becoming the preferred vehicle through which complex assets can be held either as loan security or on behalf of a multiplicity of investors" (23). The growing attraction of trusts is undoubtedly linked to their unique characteristics.
First, among the fundamental features of trusts is the (advantageous) separation of legal and equitable title: trust assets are separately held by the trustee and do not form part of his/her estate; Equity protects beneficiaries from the damaging consequences of the trustee's bankruptcy and, subject to fraudulent conveyance cases, from the settlor's bankruptcy. The trust property is taken out of the bankruptcy pot. Beneficiaries are the equitable owners of the trust property and, if need be, may trace trust assets into the hands of a third party when the trustee has paid away these assets in breach of trust. This third party will then hold the relevant property on trust for the beneficiaries provided that the third party is not a bona fide purchaser for value without notice (24). In such a case, the beneficiaries also have a secured claim to the asset against the creditors of the third party.
From the beneficiaries' point of view, another advantage and a typical attribute of trusts lie in the demanding equitable obligations imposed upon trustees (25). A strong duty of loyalty weighs on the trustee who must not profit from his/her position without the informed consent of beneficiaries. Trustees must act impartially and fairly as between beneficiaries and provide accounts and information. Equity allows the trustee and often requires him/her to exercise his/her discretion, independently of the views of the settlor (26) or the beneficiaries and in the best interests of the latter. Equity has also left much room for flexibility in the structuring of beneficial interests provided these interests meet the required standards of certainty and are not illegal or contrary to public policy. Finally, "due to the trust's distinctive origin in the sphere of family property, trusts are created, administered and wound up with an absence of state regulation, ceremony or notification" (27).
8. This last characteristic is particularly important and the OECD's report insists upon it: "[p]art of the attractiveness of misusing trusts lies in the fact that trusts enjoy a greater degree of privacy and autonomy than other corporate vehicles ... [V]irtually all jurisdictions recognising trusts have purposely chosen not to regulate trusts like other corporate vehicles, such as corporations ... [U]nlike corporations, there are no registration requirements or central registries and there are no authorities charged with overseeing trusts" (28). This discretion and the other advantages that trusts offer may thus lead criminals to try and misuse the creatures of Equity. The OECD further argues that trusts are misused for money laundering purposes, "particularly in the layering and integration stages" (29).
It should be noted that the OECD's report has been criticised for misunderstanding what a trust is (30). But even those who complain about this misinterpretation acknowledge that trusts can indeed be abused and that a comprehensive examination of how trusts can be abused has never been carried out (31). The purpose of this dissertation is not to produce this fully informed analysis on the different kinds of abuse of trusts. It is admittedly less ambitious and rather aims at identifying the possible conflicts between English anti-money laundering legislation and some of the traditional obligations imposed on the office of trustee, namely the duty of confidentiality and the duty to account.
9. Anti-money laundering provisions were first introduced in UK legislation with the Drug Trafficking Offences Act 1986 and the Prevention of Terrorism (Temporary Provisions) Act 1989. While the former made it an offence to assist in the retention of the proceeds of drug trafficking (s. 24), section 11 of the latter covers assisting another to retain 'terrorist funds'. These criminal offences still exist but the core of the anti-money laundering legislation is constituted by ss. 93A to 93G of the Criminal Justice Act 1988 as inserted by ss. 29-35 of the Criminal Justice Act 1993 (32). Five offences now apply in England and Wales (and target both the launderer and those whose conduct assists the launderer):
1. Assisting another to retain the proceeds of criminal conduct (s. 93A CJA 1988);
2. Acquiring, possessing or using the proceeds of criminal conduct (s. 93B CJA 1988);
3. Concealing or transferring the proceeds of criminal conduct to avoid prosecution or a confiscation order (s. 93C CJA 1988);
4. Tipping off (s. 93D CJA 1988);
5. Failure to disclose knowledge or suspicion of assisting the retention of the proceeds of certain criminal offences (33).
Sections 93A, 93B and 93D, on which the analysis will focus, can apply to any person and therefore to any type of person acting as trustee. As Graham Moffat points out, the choice of the trustee(s) is one of the first and most essential decisions which the settlor has to take. He or she may thus choose to appoint "himself or herself, a family friend, a professional person--probably an accountant or solicitor--or a corporate trustee (34) such as a trust department or trust subsidiary of a bank, or indeed some combination of these" (35), such combination not being uncommon.
10. The provisions of the Criminal Justice Act 1993 are supplemented by the Money Laundering Regulations 1993 ('The Regulations') issued by the Treasury. The Regulations impose further responsibilities upon those conducting a "relevant financial business" within the meaning of regulation 4. This term encompasses a rather wide range of activities: "This includes banks, building societies, investment businesses, insurance companies" and since 2001, bureaux de change and other money transmission services (36). "It also covers entities involved in the administration of securities, leasing, as well as any bodies giving advice on undertakings on capital structure, industrial strategy and related questions, as well as services relating to mergers and the purchase of undertakings. This brings in consultants as well as members of the legal and accounting professions" (37). Therefore, while unprofessional unpaid trustees of the family friend type are outside the scope of the Regulations but do have to abide by the relevant requirements of the CJA 1988, professional trustees such as solicitors and accountants and corporate trustees (38) would appear to fall within the ambit of the Regulations. Under the Regulations, those conducting a "relevant financial business" have to introduce the following procedures:
1. identifications procedures of customers/clients (39);
2. record-keeping procedures to keep an audit trail for a minimum of five years;
3. internal reporting procedures, requiring inter alia the appointment of a person to receive reports of suspicions from employees (40);
4. employee training to ensure that staff are aware of the policies and procedures of the Regulations as well as their personal obligations under the criminal law.
A breach of regulation 5 will be an offence for which a person will be liable to up to two years' imprisonment and/or a fine. The courts may take account of "any relevant supervisory or regulatory guidance" in determining whether a person has complied with any of the requirements of the Regulations. Such guidance include the Guidance Notes (41) issued by the Joint Money Laundering Steering Group. There are four sets of Notes dealing with: mainstream banking, lending and deposit taking activities; wholesale, institutional and private client investment business; insurance and retail investment products; and receiving bankers. While not being mandatory, these Notes lay down practical means of applying the regime which the Regulations have put in place. The sole violation of a regulatory guidance should not entail the imposition of criminal liability.
11. Together with the Regulations, the offences which the Criminal Justice Act 1993 introduced have set up a vigorous anti-money laundering regime. For the purpose of combating launderers, ss. 93A and 93B do seem to have abrogated the duty of confidentiality owed by professionals to their clients/customers. Even though confidentiality is seen as essential in a trust context, the duty of confidentiality of trustees, whose nature has given rise to academic debate, should not escape a similar fate. As these provisions confer an immunity against actions for breach of confidence, one may wonder what the exact scope of this immunity is meant to be.
Trustees also owe a duty to account which means that the beneficiaries have a corresponding right to information about the trust and how it is managed. Is the exercise of this right fully compatible with s. 93D which makes it an offence to disclose information to anyone who is likely to prejudice a police investigation (or proposed investigation) in relation to money laundering? Could a trustee be put in a such a situation as to 'tip off' in spite of himself?
The sacrifices that trustees are compelled to accept may not even be rewarded by the courts: the recent case of Bank of Scotland v. A Ltd shows how trustees could be faced with the dilemma of violating either s. 93A or s. 93D. This decision, which itself attracted severe criticism, was seen by a number of commentators as illustrating one of several significant flaws in the UK anti-money laundering system.
Part 1. Confidentiality in retreat: sections 93A and 93B of the Criminal Justice Act 1988 will require trustees to disregard their duty of confidence in order to fight money laundering
1. The nature of the duty of confidentiality of trustees
12. "Confidentiality has always been a duty of the trustee naturally enough since trusts are private arrangements" (42). However, the nature of this duty has given rise to discussion among distinguished authors of textbooks in trusts law and restitution law. The existence of the duty is not called into question but it is analysed in different ways.
13. In a chapter 9 entitled "The Obligations of Trusteeship" of his famous textbook, D.J. Hayton dedicates section 2 to the "Conflict of Interest and Duty" and looks at what he calls "the equitable obligation of confidence" (43). According to the author, "Equity is seen at its strictest in the duty it imposes upon a trustee not to allow himself to be put in a position where there may be a conflict between his position as trustee and his personal interest" (44). Given the organisation of the chapter, the equitable duty of confidentiality should logically be understood as an aspect or a corollary of the overriding duty of loyalty of trustees. Hayton acknowledges that "this equitable right of confidentiality is still in course of development" (45) but the way he describes this duty (or this right) closely resembles the traditional analysis of breach of confidence. The author refers to cases which other scholars such as Goff and Jones, G. Virgo, J. Martin or G. Moffat use to establish the prerequisites for an action for breach of confidence.
14. Professor Hayton thus relies on Seager v. Copydex (46) in which Lord Denning stated with his usual erudition and clarity that "[t]he law on this subject does not depend on an implied contract. It depends on the broad principle of equity that he who has received information in confidence shall not take an unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent. The principle is clear enough when the whole of the information is private" (47). In line with Seager v Copydex is the case of Coco v. A.N. Clark (Engineers) Ltd (48). This decision is clearly seen as the authority laying down the three necessary conditions that a beneficiary or indeed any other relevant person must fulfil to bring an action for breach of confidence. In Coco v. A.N. Clark (Engineers) Ltd, Megarry J explained that "in cases of contract, the primary question is no doubt that of construing the contract and any terms implied in it" and trusts are different from contracts (see footnote 30). Where there is no contract, "three elements are normally required if ... a case of breach of confidence is to succeed. First, the information itself, in the words of Lord Greene, M.R. in the Saltman case on page 215, must "have the necessary quality of confidence about it. Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it" (49).
15. As regards the first requirement, the judge added that there can be no breach of confidence in revealing to others what is already common or public knowledge, however confidential the circumstances of communication. But "something that has been constructed from the materials in the public domain may possess the necessary quality of confidentiality: for something new and confidential may have been brought into being by the application of the skill and ingenuity of the human brain" (50). This reference to "some product of the human brain" which was deemed sufficient to render an information confidential will not however be adequate in all circumstances. Private life, which English law protects, is not covered by this concept. It applies more conveniently to trade secrets for instance.
16. The second condition, requiring communication in circumstances importing an obligation of confidence, is met if a reasonableness test is satisfied: if the circumstances are such that any reasonable man standing in the shoes of the recipient of the information, would have realised that upon reasonable grounds the information was being given to him in confidence, then this should suffice to impose on him the equitable obligation of confidence (51). In Attorney-General v. Guardian Newspapers Ltd (n[degrees]2) (52), Lord Goff suggested a slightly different test, though similar in spirit: "a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all circumstances that he should be precluded from disclosing the information to others" (53). In both cases, The court therefore gave no single definition of the adequate set of circumstances and the duty may arise in a great variety of cases. Essentially, however, "a duty of confidence will arise where there was a relationship of trust between the plaintiff and the defendant, such as the relationship between doctor and patient, or where the defendant obtained information directly or indirectly from the confider which the defendant then or subsequently knew or believed to be confidential" (54). Arguably, a trustee-beneficiary relationship would fall within this category.
17. As for the third condition, which requires an unauthorised use of the information to the detriment of the communicating party, Megarry J added a qualification: "Some of the statements of principle in the cases omit any mention of detriment; others include it" (55). He did recognise that there could be cases of breach of confidence where the plaintiff does not suffer what could fairly be called a detriment. This possibility was expressly kept open. The approach taken by the High Court in Coco v. A.N. Clark (Engineers) Ltd was recently endorsed in Murray v. Yorkshire Fund Managers (56) by the Court of Appeal.
18. Graham Moffat takes a more explicitly qualified view as to the nature of the duty of confidentiality of trustees. He deals with the question in a chapter called "Fiduciary relationships, commerce and constructive trusts", under the heading "Duties (57) of confidentiality". The author explains the choice of the plural form as follows: "a duty of confidentiality can be considered to be a fiduciary duty or can be considered to be an independent equitable doctrine, and it may be unwise to be categorical on this point given that the law relating to the duty of confidentiality is still developing" (58). This comment recalls the words of Professor Hayton who does indicate that the equitable obligation of confidence...
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