Escalation of Anti-terrorism Legislation

Understandably, following the events of September last year, steps were taken to enhance the economic fight against terrorism. Two main pieces of new legislation which have recently come into force are the Anti-Terrorism, Crime and Security Act 2001 and the Terrorism (United Nations Measures) Order 2001. These substantially increase the burden on financial institutions to make reports to NCIS and, importantly, separately to the Treasury. They will, in light of the requirements of the Money Laundering Regulations 1993 and the FSA Rules, require a degree of re-training of staff and a change to internal controls.

The Terrorism Act 2000, the majority of which came into force last year, replaced the Prevention of Terrorism (Temporary Provisions) Act 1989. The Terrorism Act 2000 made it an offence to fail to disclose to NCIS a belief or suspicion (from information, which came to a person in the course of their trade, profession, business or employment) that another had committed one of the terrorist offences relating to money or property. The Anti-Terrorism, Crime and Security Act 2001 amended the failure to disclose offence in the Terrorism Act with regard to those in the regulated sector (ie those carrying out relevant financial business). It imposed an additional, higher, obligation to make a disclosure to NCIS where they had reasonable grounds for knowing or suspecting that another had committed one of the terrorist offences relating to money or property. The failure to report offence could therefore be committed even if the individual in question was not suspicious themselves.

This raises a number of important issues for financial institutions, namely:

1 How will the new test be applied in practice?

2 If the new test gives rise to more prudential reporting, what is the potential exposure of the organisation to civil liability for breach of confidentiality or defamation where unnecessary reports are made?

3 Does it apply to all of the respective financial institution’s employees or only those carrying out relevant financial business?

4 When training staff and making them aware of this new offence, to comply with paragraph 5(1)(c) of the Money Laundering Regulations and Rules 6.2 and 6.3 of the FSA Money Laundering Rules, what guidance should be given to staff? Should they be required to report internally anything unusual or inconsistent with previous account activity?

The Act also creates a further offence, imposing an obligation on all business sectors and on individuals in both their professional and personal capacities, to disclose information about acts of terrorism. The essential elements of the offence are set out below.

It is an offence for:

• a person who has information which;
• he knows or believes;
• might be of material assistance in preventing the commission by another person of an act of terrorism, or in securing the apprehension, prosecution or conviction of another person in the United Kingdom for an offence involving the commission, preparation or instigation of an act of terrorism;
• not to disclose the information, as soon as reasonably practicable, to a constable.

The second new piece of legislation is the Terrorism (United Nations Measures) Order 2001. This creates a number of offences which are of particular relevance to financial institutions. Firstly it is an offence for any person, except with a licence granted by the Treasury, to make any funds or financial (or related) services available directly or indirectly to or for the benefit of a person who commits, attempts to commit, facilitates or participates in the commission of acts of terrorism. A person includes persons controlled or owned directly or indirectly by that person or a person acting on behalf, or at the direction, of such a person.

The potential scope of this offence is very unclear. At first glance it appears that this offence is a strict liability offence where it is irrelevant whether the provider knew or suspected that the funds were to be used for terrorist activity. Therefore even if the institution had appropriate KYC procedures which were properly followed this would not appear to be a defence if it inadvertently provided financial services to a terrorist. In practice we suspect that, where the institution is not culpable, it is unlikely a prosecution would be brought. Secondly, whilst the term "funds" is defined in the Order, "financial services" is not defined and potentially could apply to a whole host of activities. In practice a financial institution is likely to have to assume that all of the services it provides would fall within the ambit of the Order.

The Order also makes it an offence, inter alia, for a bank or building society not to disclose to the Treasury a knowledge or suspicion that a customer (or a person who was a customer at any time since 10 October 2001) or a person with whom the institution has had dealings since that date, is a person who commits or attempts to commit, facilitates or participates in the commission of acts of terrorism. It would therefore appear that where terrorism is suspected or there are grounds to suspect it, a report may have to be made to NCIS and to the Treasury.

© Herbert Smith 2002

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