PastPaperHero | Money laundering and anti-money laundering regulations

Learning Outcomes

This article explains the statutory defences to the principal money laundering offences under the Proceeds of Crime Act 2002 (POCA 2002), detailing how the authorised disclosure/consent (DAML) regime operates in practice (notice period, moratorium, extensions), the scope and limits of the adequate consideration defence to s 329, and the overseas conduct defence to ss 327–329; it discusses supporting concepts that interact with these defences—such as the reasonable excuse defence for late reporting, legal professional privilege (privileged circumstances), and the “lack of training” defence to s 330—and examines how the defences interplay with regulated sector obligations under the Money Laundering Regulations 2017 (as amended) and professional duties (confidentiality, tipping off, SRA requirements), using realistic scenarios to clarify common pitfalls (e.g. assuming a s 329 defence assists with s 327/328 or with failure to disclose).

SQE1 Syllabus

For SQE1, you are required to understand the statutory framework for money laundering offences and the principal defences available, with a focus on the following syllabus points:

the main money laundering offences under POCA 2002 (concealing, arrangements, acquisition/use/possession, and failure to disclose)
the requirements and operation of the authorised disclosure (Suspicious Activity Report) defence and the consent/DAML process (notice period, moratorium, extensions)
the adequate consideration defence and its limitations (including CPS approach to reasonable fees)
the overseas conduct defence and its conditions (lawful where done and UK seriousness threshold)
the relationship between these defences and anti-money laundering compliance duties (e.g. customer due diligence, reporting, legal professional privilege, training)
how to apply these defences to practical scenarios involving legal professionals, including managing tipping off risks and the role of the nominated officer

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

What is the effect of making an authorised disclosure (Suspicious Activity Report) before carrying out a transaction that may involve criminal property?
In what circumstances can a person rely on the adequate consideration defence to a s 329 POCA 2002 offence?
When does the overseas conduct defence apply to money laundering offences under POCA 2002?
True or false? A solicitor who fails to submit a suspicious activity report when required can rely on the adequate consideration defence if they acted for fair value.

Introduction

Money laundering is the process of disguising the origins of criminal property to make it appear legitimate. The UK has a robust legal framework to combat money laundering, primarily through the Proceeds of Crime Act 2002 (POCA 2002) and the Money Laundering Regulations 2017. The offences are broadly drafted and capable of catching a wide range of conduct, including professionals who inadvertently assist clients. Statutory defences mitigate this breadth, most notably the authorised disclosure/consent mechanism (often referred to as DAML), the adequate consideration defence to s 329, and the overseas conduct defence. In addition, certain related protections apply in specific contexts, such as the “reasonable excuse” defence for late reporting, privileged circumstances (legal professional privilege) for the s 330 failure to disclose offence, and the “lack of training” defence for those in the regulated sector. Understanding precisely when each applies—and when it does not—together with how compliance duties under the Regulations align with these defences, is essential.

Main Money Laundering Offences: Quick Recap

POCA 2002 creates several main money laundering offences:

Concealing, disguising, converting, transferring, or removing criminal property (s 327)
Entering into or becoming concerned in an arrangement which facilitates the acquisition, retention, use, or control of criminal property (s 328)
Acquiring, using, or possessing criminal property (s 329)
Failing to disclose knowledge or suspicion of money laundering (s 330–331, regulated sector)

Key Term: criminal property
Property that constitutes or represents a person's benefit from criminal conduct, directly or indirectly, and the alleged offender knows or suspects it is such.

The suspicion threshold is low: a genuine suspicion that the property may represent criminal proceeds is enough, not proof. For s 330 (regulated sector), liability can arise where there are reasonable grounds for suspicion, whether or not the person actually suspects, unless other statutory defences are available.

Authorised Disclosure Defence

The most important statutory defence to the main money laundering offences (ss 327–329) is making an authorised disclosure, commonly known as submitting a Suspicious Activity Report (SAR).

Key Term: authorised disclosure
A report made to a nominated officer or the National Crime Agency (NCA) under s 338 POCA 2002, disclosing suspicion or knowledge of money laundering, which may provide a defence to certain offences.

Key Term: Suspicious Activity Report (SAR)
A formal report submitted to the NCA (or a firm's nominated officer) when a person knows or suspects money laundering, triggering the authorised disclosure defence.

Key Term: DAML (defence against money laundering)
The NCA’s consent regime. If consent is granted (or deemed), the reporter has a defence to ss 327–329 for the reported act. If refused, a moratorium applies.

How the Defence Works

If a person makes an authorised disclosure before carrying out the act (e.g. a transaction), and either receives NCA consent (a DAML) or the statutory notice period expires without refusal, they will not commit the offence(s) in respect of the reported act. If consent is refused within seven working days, a 31-day moratorium period applies during which the act must not be done without further consent. The moratorium can now be extended by a court, in increments, up to a statutory maximum (currently up to 217 days in total), where necessary to allow law enforcement to investigate.

If the disclosure is made after the act, it may still be a defence if there was a reasonable excuse for not disclosing earlier and the disclosure is made as soon as practicable. The reasonable excuse must be fact‑specific and credible (e.g. an immediate risk to safety or an honest and reasonable, but mistaken, belief that a colleague had already reported).

Disclosures can be made internally to the firm’s nominated officer (MLRO) or externally direct to the NCA. In a regulated firm the appropriate first step is usually internal disclosure to the nominated officer, who then decides whether to make an external SAR.

Key Term: nominated officer
The person within a regulated firm responsible for receiving internal disclosures about money laundering and making external reports to the NCA.

The defence covers the specific prohibited act described in the SAR. Care should be taken to describe the proposed act clearly; if the actual conduct diverges materially from what the NCA considered, the defence may not apply.

Legal professional privilege (or privileged circumstances) must be respected. If the information is privileged, there is no obligation to disclose it and it must not be reported. However, privilege does not protect communications made for the furtherance of a criminal purpose (the crime‑fraud exception).

Key Term: legal professional privilege (privileged circumstances)
Information communicated in connection with the giving of legal advice or legal proceedings is exempt from the duty to disclose for s 330–331. The crime‑fraud exception removes privilege where the communication furthers a criminal purpose.

Practical Steps

Make the disclosure before the act, where possible, with sufficient detail for the NCA to identify the parties, property, accounts, and relevant timings.
Wait for NCA consent (up to 7 working days from the day after the NCA receives the SAR). If consent is refused, do not proceed during the 31‑day moratorium (subject to any court‑approved extensions).
Avoid tipping off. If asked by the client about delays, give neutral explanations (e.g. internal processes) without revealing that a SAR has been made or that an investigation is contemplated.
If disclosure must be made after the act, set out the reasonable excuse for the timing and report as soon as practicable.

Proceeding during the notice or moratorium period without DAML risks committing an offence under ss 327–329. Acting cautiously, documenting decision‑making, and seeking internal AML guidance is prudent.

Worked Example 1.1

A solicitor suspects that client funds for a property purchase may be proceeds of crime. What should the solicitor do to avoid liability under POCA 2002?

Answer:
The solicitor should make an authorised disclosure (SAR) to the firm's nominated officer or directly to the NCA before proceeding. They must wait for consent or the expiry of the notice period before completing the transaction. If they follow this process, they will have a defence to the main money laundering offences.

Worked Example 1.2

A conveyancer realises on completion morning that third‑party funds may be tainted. Completion is time‑critical. The conveyancer files a SAR that afternoon, after sending the funds, explaining there was no time to report earlier. Does a defence exist?

Answer:
A post‑transaction SAR only assists if there is a “reasonable excuse” for late reporting and the disclosure was made as soon as practicable. Time pressure alone is unlikely to constitute a reasonable excuse if the suspicion crystallised before completion. The defence may fail. The safer course was to pause and seek DAML.

Adequate Consideration Defence

Section 329(2)(c) POCA 2002 provides a defence to the offence of acquiring, using, or possessing criminal property if the person acquired the property for adequate consideration (i.e. fair market value) and did not know or suspect it was criminal property.

Key Term: adequate consideration
Payment of fair value for property (goods or services) such that the person did not know or suspect the property was criminal property. The defence is unavailable if the goods or services help to carry out criminal conduct and the person knows or suspects that.

This defence is tightly confined to s 329. It does not apply to s 327 or s 328, and it does not excuse a failure to disclose under s 330 in the regulated sector. Importantly, for services that would themselves facilitate or further criminal conduct (e.g. laundering, structuring, creating sham documents), the defence is not available even if the fee is “fair”. In contrast, ordinary legitimate services—such as legal advice or litigation services—can fall within the defence if the fees are reasonable and the adviser had no knowledge or suspicion of money laundering. The CPS guidance recognises that professional advisers who receive reasonable, arm’s‑length fees for legitimate work may rely on this defence to s 329, but any significant mismatch between value and fee will undermine it.

Where suspicion subsequently arises (e.g. after receiving a fee), the adviser should consider making an internal disclosure to the nominated officer to satisfy s 330 obligations and manage the risk of future tainted payments.

Worked Example 1.3

A jeweller buys a gold watch from a customer at its full market value, unaware it was stolen. Can the jeweller rely on the adequate consideration defence if prosecuted under s 329 POCA 2002?

Answer:
Yes, provided the jeweller paid fair value and did not know or suspect the watch was criminal property, the adequate consideration defence applies.

Worked Example 1.4

A criminal defendant pays a solicitor a reasonable fixed fee for trial advocacy. Only after the case concludes does the solicitor learn the funds likely came from drug trafficking. Is the solicitor protected?

Answer:
For s 329, the adequate consideration defence may apply if the fee reflects fair value and the services were legitimate. However, once suspicion arises, the solicitor must consider s 330 duties for any further funds. The defence does not cure a failure to disclose when required.

Overseas Conduct Defence

Sections 327(2A), 328(3), and 329(2A) POCA 2002 provide a defence where the relevant criminal conduct occurred outside the UK and was lawful in that country. The defence is bounded by a seriousness threshold: if the same conduct would be punishable in the UK by 12 months’ imprisonment or more, the defence will not apply.

Key Term: overseas conduct defence
A defence to money laundering offences where the conduct occurred outside the UK, was lawful in that jurisdiction, and would not be punishable by 12 months' imprisonment or more if done in the UK.

Two points require emphasis. First, if UK law would treat the same conduct as a serious offence (12 months’ maximum or more), the defence is unavailable even if it was lawful abroad. Secondly, the defence does not displace other legal regimes: for example, dealing with property connected to a designated person under the UK financial sanctions regime is prohibited without a licence, irrespective of the overseas conduct defence. Regulated sector obligations (CDD, monitoring, reporting) still apply to relationships or transactions involving overseas elements.

Worked Example 1.5

A UK accountant assists a client in a transaction that is legal in the client's home country but would be money laundering in the UK. Can the accountant rely on the overseas conduct defence?

Answer:
Yes, if the conduct was legal where it occurred and would not be punishable by 12 months or more in the UK, the overseas conduct defence may apply. If the equivalent UK offence would meet the 12‑month threshold, the defence will fail. Sanctions restrictions remain separately relevant.

Worked Example 1.6

A UK firm is asked to structure a payment for an overseas client involving a gambling activity lawful in the client’s jurisdiction but criminal in the UK (punishable by over 12 months). The funds pass through a UK bank. Is the defence available?

Answer:
No. Because the equivalent UK offence is punishable by at least 12 months, the overseas conduct defence is not available. The firm must also consider sanctions, CDD, and reporting duties.

Relationship with Anti-Money Laundering Compliance

The statutory defences do not dilute compliance duties under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended). Legal professionals must:

Carry out customer due diligence (CDD), including identifying beneficial owners and understanding the purpose and intended nature of the relationship
Apply simplified or enhanced due diligence (EDD) as risk demands (e.g. PEPs, high‑risk third countries, complex/unusual transactions)
Monitor transactions and relationships on an ongoing, risk‑sensitive basis
Make SARs promptly where appropriate and manage the consent (DAML) process correctly
Maintain records of CDD and SAR‑related decisions for the prescribed period

Failure to comply with these duties may leave a professional exposed to regulatory action and criminal liability (e.g. s 330–331). Legal professional privilege must be preserved; however, the crime‑fraud exception prevents privilege from being asserted over communications intended to further criminal conduct.

Key Term: customer due diligence (CDD)
The process of verifying a client's identity and assessing the risk of money laundering before establishing a business relationship or carrying out a transaction.

Key Term: moratorium period
The 31‑day period (from refusal) during which the reporter must not proceed with the prohibited act without NCA consent; it can be extended by court order up to the statutory maximum.

Key Term: reasonable excuse (late SAR)
A limited defence where a disclosure is made after the act; there must be a credible reason for not making the disclosure before the act and the report must be made as soon as practicable.

The failure to disclose offence (s 330) has bespoke defences: a reasonable excuse for non‑disclosure; privileged circumstances; and, in the regulated sector, lack of appropriate AML training. The “lack of training” defence is narrow and emphasises the importance of firms’ training programmes.

Whenever a SAR is made, practitioners must also manage tipping off (s 333A). A person in the regulated sector commits an offence if they disclose that a SAR has been made, or that an investigation is contemplated or underway, where the disclosure is likely to prejudice an investigation, subject to limited statutory exemptions. Neutral, non‑misleading client communications and internal compliance handling reduce the risk.