Surviving the 'POCA freeze'
Which party should bear the cost of complying with POCA? Mickaela Fox & Nicholas Medcroft examine the consent regime.
Part 7 of the Proceeds of Crime Act (POCA) is concerned with money laundering. As well as creating the principal money laundering offences it establishes the consent regime, whereby a party that makes an 'authorised disclosure' to, and obtains 'appropriate consent' from the National Crime Agency (NCA) is afforded a defence to money laundering.
Appropriate consent can be actual or deemed. Deemed consent arises in two ways: firstly, if no reply is received to an authorised disclosure within seven days; and secondly, where consent to an authorised disclosure is refused, then after a 31-day moratorium period, if the disclosing party has heard nothing, consent is deemed to be given. Recent amendments to POCA in the Criminal Finances Act 2017 provides that the moratorium period may be extended for up to an additional 31 days at a time, up to a maximum of 186 days (see new sections 336A-336D of POCA).
The POCA interferes with and disturb the relationship between the discloser and the client. Refusing to act on a customer's instructions may cause them severe economic damage and can lead to expensive litigation. Many of the reported cases (unsurprisingly) involve banks. The statutory procedure, however, applies to any individual or entity who suspects that they may be dealing with criminal property, including, for example, trustees and conveyancing solicitors. The consent regime puts these individuals in an unenviable position—they must navigate their way between the Scylla of criminal liability for money laundering and the Charybdis of civil liability for breach of contract if they refuse to execute payment instructions.
Statutory safe harbour
An amendment to s 338 POCA introduced in 2015 offers a lifeline. Section 338(4A) provides: 'Where an authorised disclosure is made in good faith, no civil liability arises in respect of the disclosure on the part of the person by or on whose behalf it was made.' Section 338(4A) is not, however, a complete panacea. First, the burden of proof is still on the discloser to prove the suspicion, by making relevant disclosure and then calling evidence to support the suspicion. Thus in order to rely on s 338(4A) the discloser needs to reveal the basis of its suspicion. Second, at the time any proceedings are issued by the aggrieved customer (typically for an injunction together with a claim for damages) the tipping off provisions apply. These provisions prohibit the reporting person from telling the customer and the court that it held a suspicion, and the reasons for its suspicion. These provisions are particularly important in the notice and moratorium periods if an application for a restraint order is to be made by the authorities. Where the tipping off provisions are relevant, the customer is likely to be presented with a wall of silence and a court is unlikely to be in a position to assess the merits of any application for interim relief, still less the merits of the underlying claim for damages. In the fullness of time, there will come a point when the tipping off provisions are no longer engaged and the defendant will be able to disclose the suspicion. In light of this new information, the aggrieved customer may well abandon his claim. However, by this time both parties are likely to have incurred significant legal costs. Who should bear these costs in such circumstances? Until Brien v Irwin Mitchell  EWHC 742, there had been no reported cases on this question.
Brien v Irwin Mitchell
In Joshua Brien v Irwin Mitchell the court was charged with the task of determining who should pay the costs of Part 8 proceedings brought by Brien against the law firm Irwin Mitchell for an order requiring that the firm account to him for the proceeds of sale of his former home.
Irwin Mitchell was instructed to act on the sale of Brien's former home and the purchase of a new property. The sale proceeds were to be used to partly fund the purchase, which was scheduled to complete shortly after the sale. Following completion of the sale transaction Irwin Mitchell made an authorised disclosure to the NCA. The NCA refused Irwin Mitchell consent, triggering the 31-day moratorium period. During this period Brien was served with notice to complete and a demand for payment of the deposit on the purchase. He asked Irwin Mitchell to explain why the purchase transaction had not completed as planned and the firm was unable to provide that explanation for fear of tipping off. The Part 8 claim ensued.
By the time the court came to determine the Part 8 claim the substantive issues had fallen away: the NCA had given Irwin Mitchell consent to release the monies. In addition, the tipping off provisions were no longer engaged and Irwin Mitchell had been able to explain why it had acted in the way that it had. However, the parties' costs, including the costs of two previous interim hearings, were significant. Brien argued that he should be awarded the costs on the basis that he regarded himself as the winner: he issued the Part 8 Proceedings to obtain release of the monies held by Irwin Mitchell and that is what had happened (albeit that the release of the deposit monies was due to the giving of consent by the NCA and not to the continued pursuit of the Part 8 claim). He did not challenge the propriety of Irwin Mitchell making the disclosure to the NCA. Indeed, he accepted that, on the basis of the information the firm had received, they were obliged to make the disclosure. However, Brien's case was that, subject to some modest exceptions, Irwin Mitchell should pay his costs.
Irwin Mitchell argued that it should be awarded costs: the Part 8 claim brought by Brien was always doomed to fail because of the application of the POCA provisions. Irwin Mitchell referred the court to the statutory safe harbour in s 338(4A) and also the leading authority of N v Royal Bank of Scotland  1 WLR 3938 in which the Court of Appeal emphasised that, save in exceptional circumstances, the court cannot intervene in the statutory procedure under POCA. Exceptional circumstances which might justify the intervention of the court would be where the disclosing person had acted in bad faith. However, in this case Brien had expressly disavowed bad faith.
In giving judgment for Irwin Mitchell, Rose J emphasised that she was not being invited to—and nor could she—make any findings in relation to the allegations against Brien.
Rose J summarised the dilemma facing the court in this way: '…courts that have previously dealt with POCA applications have referred to the potentially draconian operation of those provisions and the risk of them leading to great unfairness for an innocent person who suddenly finds themselves in a position where their bank refuses to carry out their instructions or their solicitor refuses to hand over money which is clearly held on trust for that customer. In those cases, as in the present case, the court does not know at the time that the proceedings are disposed of whether there is any substance to the allegations against the customer. That is the case here. Conversely, the bank or firm of solicitors is put in a very difficult position, caught between its obligations to its customers and its duties under the POCA which are enforceable by criminal penalties.'
In the event the court was assisted by the particular facts of the case. Shortly after issuing the Part 8 claim, and at the instigation of Irwin Mitchell, Brien received a letter from the Metropolitan Police, which the judge found contained sufficient information to make Brien realise that Irwin Mitchell could not accede to his request. The judge considered that there was considerable force in the submission advanced on behalf of Irwin Mitchell that, having regard to this letter and bearing in mind that there was no allegation of bad faith on the part of Irwin Mitchell, there was really no prospect of the court doing anything other than what happened: namely awaiting the decision of the NCA about whether the funds could be released. In those circumstances, the claimant took a risk in continuing to pursue proceedings. The judge awarded Irwin Mitchell its costs from the date of the letter from the Metropolitan Police onwards. Up until that point, the judge regarded the fair order as being that the costs should lie where they fall.
The decision in Brien highlights the potential for the disclosing party to be held liable for some of the costs of consequential litigation despite the disclosure being in good faith.
The difficulty with the 'POCA freeze' is that claimant are often unaware of the facts and because of the tipping off provisions, the disclosing defendants will be unable to disabuse him. The increase in the length of the moratorium period under the Criminal Finance Act 2017 extends this period of uncertainty even further and is likely to lead to increased legal costs for all.
Some may argue that compliance with POCA is a regulatory risk and should be considered a regulatory cost, part and parcel of the services the disclosing bodies choose to offer. This factor may in part have informed the judge's decision to order that the costs at the initial stage of the proceedings, when Brien was operating in the dark, should lie where they fall. But regulatory costs are borne by the business, its insurers and ultimately consumers. Is this fair and just?
The counter argument is that there is no principled basis to depart from 'the loser pays' rule. Why should a wrongfully sued party be out of pocket by having to contribute to the costs of securing their legal rights against an opponent whose claim was mistaken?
It is in the public interest for the regulated sector to report money laundering and the concern is that reporting entities may be discouraged if they know that they may have to contribute to the cost of defending civil claims arising from their reports. The 'POCA freeze' is now widely known and understood. Before launching civil proceedings, an aggrieved customer may reasonably be expected to seek legal advice. He will be made aware (a) of the possibility that POCA is engaged (b) that Parliament has laid down a 'POCA freeze' timetable, which has been described by the Court of Appeal as both 'workable' and 'reasonable' and (c) that all the defendant has to do to defend these types of claim is to establish suspicion. If the customer decides to litigate regardless then why should he not run the risk of an adverse costs order? Indeed, the risk that the customer may have to pay all legal fees would operate as a useful disincentive against bringing a frivolous claim.
There is a further argument in favour of 'the loser pays' rule. It is in the public interest for the regulated sector to report money laundering. Reporting entities may be discouraged from reporting if they know that, even where their conduct is beyond reproach, they may have to contribute to their own costs of defending civil claims arising from their reports.
Mickaela Fox, partner, Weightmans.
Nicholas Medcroft, Fountain Court Chambers.
This article was first published in New Law Journal.