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Point of law - Time to clean up our act, by Stephen Cirell and John Bennett

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15 July 2005

Some local authorities have still not introduced any procedures to prevent money laundering, although they have been legally required to do so for more than a year. It's time they woke up to the very real risks

Money laundering and the disposal of the proceeds of crime are seen as peripheral risks by many councils. In other words, these are things private sector professionals need to worry about, not in-house lawyers, accountants or auditors.

But this is a dangerous stance to take as the government has introduced provisions in this area with particularly sharp teeth, including personal liability for those who transgress. The PR damage from such an incident should be enough in itself to prompt councils to take steps to reduce the risks.

The law is provided by the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003. These provisions are targeted at the prevention and effective identification of money laundering activity and its proper notification to the authorities. They have been tightened since the early regulations and now cover several areas of council business.

The Proceeds of Crime Act created a number of money laundering offences that can be committed by any person or body. Money laundering does not just cover the simple transformation of criminal money into legitimate assets, but a range of activities involving the proceeds of crime. It is an offence to conceal, disguise, convert or transfer criminal property; or to enter into a transaction that a person knows or suspects involves the acquisition, retention, use or control of criminal property, or to facilitate such a transaction.

Criminal property is widely defined and includes a person's benefit from criminal conduct where you know — or even suspect — that this is the case. Examples of risk areas include the sale of assets (from council houses to strips of miscellaneous land) where payment is made in cash, or where the price paid is more than the asking price.

The Money Laundering Regulations seek to combat this type of activity by requiring those conducting 'relevant business' to: implement a reporting procedure; appoint a money laundering reporting officer (MLRO); maintain client identification procedures; and maintain record-keeping procedures.

The definition of 'relevant business' includes advice by a body corporate about the tax affairs of a body; provision of accountancy, audit and legal services by a body corporate; provision of business services in relation to the formation, operation or management of a company or trust; or the dealing in goods whenever a transaction involves accepting a cash payment of e15,000 or more.

This, therefore, includes councils' cash transactions and provision of professional services to other organisations. These pose more of a risk than is immediately obvious because local authorities not only act for themselves but for other local authorities, public bodies of various types and quangos. They also act for central government in an agency capacity and for other legal entities such as schools.

Following the Local Government Act 2003, they might enter arrangements with a variety of private sector bodies too, for charging or trading purposes.

So any suggestion that they are not in the line of fire is clearly mistaken. Amazingly, there are still local authorities that have not implemented any money laundering procedures, although this became a legal duty on March 1, 2004.

A well informed and prepared authority will have: appointed and fully trained an MLRO; rolled out basic training for all legal and finance staff; explored the links to other areas such as whistleblowing; and tested systems of client identification and record-keeping.

These issues are second nature in the private sector now. As external lawyers in a large commercial international firm, we cannot even open a file to act for a client without following detailed procedures about money laundering, frustrating though these might be.

So what are the risks for councils? First, there are the obvious ones: not having taken any action. Where authorities have thought about this area, they need to ensure that their response is proportionate, with the right level of training, and systems that are adequate for protection but not 'over the top'.

Some functional areas clearly generate more risk than others and so every authority needs to apply a process of risk planning and then introduce preventative measures.

To be frank, many who work in the private sector find money laundering procedures a pain in the backside. But most legal and accountancy practices cannot afford the risk of a major scandal. Imagine what a Crown Court judge would think of a metropolitan council that had a very large revenue budget and diverse legal and financial activities but no procedures in place?

Money laundering should be up there on the 'insomnia radar' of the average chief executive.

Stephen Cirell is head of local government and Professor John Bennett is a consultant solicitor with Eversheds. They are authors of Best Value law and practice and Charging and trading in local government

PFjul2005

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