Privileged circumstances

Privileged circumstances

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Privilege reporting exception

This is distinct from Legal professional privilege.

A professional legal adviser or other relevant professional adviser who suspects or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering is exempted from making a money laundering report where his knowledge or suspicion comes to him in privileged circumstances (the privilege reporting exception). In such circumstances, provided that the information is not given to him with the intention (by his client or another person) of furthering a criminal purpose ('the crime/fraud exception' – see below), Section 330(6) affords the adviser a complete defence against a charge of failure to disclose (i.e., to make a SAR).

The term professional legal adviser includes solicitors, their non-solicitor partners and their employees, barristers and in-house lawyers.

A relevant professional adviser is an accountant, auditor or tax adviser who is a member of a professional body which is established for accountants, auditors or tax advisers (as the case may be) and which makes provision for (a) testing the competence of those seeking admission to membership of such a body as a condition for such admission; and (b) imposing and maintaining professional and ethical standards for its members, as well as imposing sanctions for non-compliance with those standards.

The privilege reporting exception also extends to persons in partnership with (or equivalent), or employed by, the relevant professional adviser to provide them with assistance or support. The information must come to these partners or employees in connection with this assistance or support and to the relevant professional adviser in privileged circumstances.

Discussions with the MLRO to seek advice about making a report shall not be taken to be an internal report when it was not intended as such, e.g., if the person initiating the discussion believes the matter falls within the privilege reporting exception and contacts the MLRO to confirm this. On receipt of such an approach, the MLRO should still collect the information which would otherwise be included in the required disclosure to enable careful consideration with the reporter of whether or not the matter falls within the privilege reporting exception and, if it does, whether this is overridden by the crime/fraud exception. The MLRO should document the decision reached in this regard and the reasons for reaching that decision.

If a professional adviser considers that the information or other matter on which his knowledge or suspicion is based came to him in privileged circumstances, he is obliged to apply the privilege reporting exception (unless the crime/fraud exception applies) and so has no discretion to make a report. This means that the professional adviser could find himself in a situation where he might wish to make a report but is prevented from doing so. In such circumstances, he should consider whether he may continue to act, but in making his decision he will need to bear in mind the provisions relating to prejudicing an investigation (The secondary money laundering offences).

Whether or not the privilege reporting exception applies needs to be considered carefully, including a consideration as to whether the professional adviser was working in privileged circumstances when the particular information or other matter came to him. This is an important consideration, as a professional adviser may be providing a variety of services to a client, not all of which may create privileged circumstances for this purpose. Accordingly, a careful record should be maintained of the provenance of information considered when a decision is made on the applicability or otherwise of the privilege reporting exception.

Privileged circumstances means information communicated:

  • By a client, or a representative of a client, in connection with the giving of legal advice to the client
  • By a client, or by a representative of a client, seeking legal advice from the professional adviser
  • By a person in connection with legal proceedings or contemplated legal proceedings

Set out below is a description of the two types of privileged circumstances and some examples of work which may fall within or outside of them.

Legal advice

For the privileged circumstances to apply, the following conditions need to exist:

  • There needs to be a confidential communication (written or oral) between the professional adviser and his client, or a representative of the client, in which the client seeks or the professional adviser gives legal advice
  • That communication must take place within the confines of a professional relationship between them, including an initial meeting which does not progress to a business relationship
  • The communication must relate to legal advice (i.e. advice concerning the rights, liabilities and obligations or remedies of the client under the law)

Examples of when professional advisers might fall within privileged circumstances as regards legal advice privilege include:

  • Advice on taxation matters, where the tax adviser is giving advice on the interpretation or application of any element of tax law and in the process is assisting a client to understand his tax position
  • Advice on the legal aspects of a take-over bid, for example on points under the Companies Act legislation
  • Advice on duties of directors under the Companies Act
  • Advice to directors on legal issues relating to the Insolvency Act 1986, e.g. on the legal aspects of wrongful trading
  • Advice on employment law

Litigation

For the privileged circumstance to apply, the following conditions need to exist:

  • There must be a confidential communication (written or oral) between the professional adviser and the client or third party
  • The confidential communication must be made for the dominant purpose (i.e. the overriding purpose) of being used in connection with actual, pending or contemplated litigation.

Defining contemplated litigation is difficult. In summary, it is usually necessary to be able to identify some act that gives rise to a cause of action in relation to which some threat of legal action has either been clearly intimated or is more than reasonably likely to follow. The party seeking to claim the benefit of litigation privilege must show that he was aware of circumstances that rendered litigation between himself and a particular person or class of persons a real likelihood rather than a mere possibility.

The reasons for the conclusion reached as to whether the privilege reporting exception applies should be carefully documented. If the professional adviser decides it does apply, he must act in accordance with the privilege reporting exception rules unless the crime/fraud exception applies.

Section 330(9A) protects the privilege attaching to any disclosure made to an MLRO for the purposes of obtaining advice about whether or not a disclosure should be made.

The Crown Prosecution Service guidance for prosecutors indicates that if a professional adviser forms a genuine, but mistaken, belief that the privilege reporting exception applies (for example, the client misleads the adviser and uses the advice received for a criminal purpose) the adviser will be able to rely on the reasonable excuse defence (The secondary money laundering offences).

Crime/fraud exception

Before determining whether the privilege reporting exemption must be applied, consideration needs to be given to whether the exemption is lost through application of the crime/fraud exception. The privilege reporting exception does not apply to information or any other matter which is communicated or given with the intention of furthering a criminal purpose.

This means that communications that would otherwise qualify under one or other of the above two types of privilege are not covered by the privilege reporting exception where the communication was intended to facilitate or to guide someone (usually the client but possibly a third party) in the commission, or furtherance, of any crime or fraud.

An example of this might be where tax advice was sought ostensibly to enable the affairs of a tax evader to be regularised but in reality was sought to aid continued evasion by improving the evader's understanding of the relevant issues.

The crime/fraud exception also applies where communication takes place between a client and his adviser in circumstances where the client is the innocent tool of a third party's criminal or fraudulent purpose. An example of this might be where a money launderer gives money to a family member, who is unaware of the source of that money, to purchase a property, for which purpose he communicates with his adviser.

The crime/fraud exception does not apply where the adviser is approached to advise on the consequences of a crime or fraud or similar conduct that has already taken place and where the client has no intention, in seeking advice, to further that crime or fraud. This means that a person who is concerned that he may be guilty of tax evasion can approach a tax adviser for legal advice in this regard without fear of the exception being invoked. This remains the case even if the potential client declines a client relationship having received the advice, and the adviser does not know whether the person will proceed to rectify his affairs. However, if the person behaves in a way that makes the adviser suspicious that he intends to use the advice to further his evasion, then a report could be required.

The crime/fraud exception is a difficult area and the Courts will not usually allow the exception to be invoked unless there is reasonably compelling circumstantial evidence available that demonstrates that the communications have in some way been intended to further the crime or the fraud. A mere speculation may not be sufficient as a basis to invoke it.

Differences between legal professional privilege (LPP) and privileged circumstances

The following is relevant to professional legal advisers.

Protection of advice

When advice is given or received in circumstances where litigation is neither contemplated nor reasonably in prospect, except in very limited circumstances communications between a professional legal adviser and third parties will not be protected under the advice arm of LPP.

Privileged circumstances, however, exempt communications regarding advice to be provided to representatives, so this may include communications with:

  • A junior employee of a client
  • Other professionals assisting in a transaction such as surveyors or estate agents

Losing protection by dissemination

Under common law, privileged information can be shared within law firms without losing the protection of LPP and this can include other persons with a common interest, such as co-defendants. As such under common law, privileged material can be put into a data room for the purposes of a transaction and will remain privileged if it is stipulated that privilege is not waived.

For the privileged circumstances exemption to apply, the information must actually be exchanged for the purpose of giving or seeking legal advice. As such the protection is likely to be lost if information is put in a data room and viewed by the other side.

Vulnerability to seizure

It is important to correctly identify whether communications are protected by LPP or if they are merely covered by the privileged circumstances exemption. This is because the privileged circumstances exemption exempts professional legal advisers from certain POCA provisions. It does not provide any of the other LPP protections to those communications. Therefore a communication which is only covered by privileged circumstances, not LPP, will still remain vulnerable to seizure or production under a court order or other such notice from law enforcement.

Disclosure

If the communication is covered by LPP and the crime/fraud exception does not apply, a professional legal adviser cannot make a disclosure under POCA.

If the communication was received in privileged circumstances and the crime/fraud exception does not apply, a professional legal adviser is exempt from the relevant provisions of POCA, which include making a disclosure to SOCA.

If neither of these situations applies, the communication will still be confidential. However, the material is disclosable under POCA and can be disclosed, whether as an authorised disclosure, or to avoid breaching Section 330. Section 337 permits a professional legal adviser to make such a disclosure and provides that he will not be in breach of his professional duty of confidentiality when he does so.