Money laundering and blocking accounts: best practice guidance

Regulated financial institutions around the world follow a similar process when it comes to reporting suspicions of money laundering via Suspicious Activity Report (SAR) disclosures to their regulator or law enforcement. However, there may be some deviation in how the blocking of client bank accounts is handled, both globally and from institution to institution. It may not always be as straightforward as blocking and closing a bank account when suspicious activity is detected.

United Kingdom: A use case

Take the UK as an example, and a situation in which a financial institution knows or suspects that their client is involved in money laundering. They are aware that a transaction is to take place but hasn’t occurred yet. The ‘Consent’ provisions in the Proceeds of Crime Act 2002 (POCA, Sections 335 to 336D under Part 7) prohibit the financial institution from carrying out that transaction until they have sought ‘Appropriate Consent’ from authorities. To do so without the appropriate consent, the financial institution could be found guilty of a money laundering offense if it moves the ‘criminal property’ without requesting what is known as a Defence Against Money Laundering (DAML) first.

A key element of requesting a DAML is ensuring the organization is confident that it has ‘grounds for knowledge or suspicion’ that their client is involved in, or attempting, money laundering.  While ‘knowledge’ that somebody is actually involved in money laundering may be easier to define and can be proven, ‘suspicion’ is more subjective and would fall short of proof of knowing. It has been defined by courts that suspicion demands more than mere speculation, and requires a foundational basis – transactions that seem unusual are not automatically suspicious.

The widely publicised HSBC v Shah case, where a client challenged the bank’s decision to block a series of transactions while it sought consent, has shown that it is imperative to ensure there is a solid basis for knowing or suspecting money laundering before proceeding to block accounts or transactions when a DAML request is being made.

When going ahead with a DAML request, the financial institution would need to typically block either whole or part of the funds in the account. In the UK, for such circumstances the legal concept of ‘fungibility’ is important for financial institutions to understand. Referring to units that are interchangeable with one another, this is where even a relatively small amount of criminal property can taint the whole balance of an account. In relation to fungibility, the UK’s National Crime Agency (NCA) SAR and DAML FAQ note that: “If necessary, consideration ought to be given to seeking legal or regulatory advice on such matters”.

Where a DAML has been made, the transaction(s) in question cannot proceed, and the account may remain blocked until either appropriate consent has been granted by authorities or a specified time (per provisions under POCA) has lapsed without authorities refusing consent. The period under which the account is blocked can be a challenging time for financial institutions, especially if the client returns to carry out the transaction at the time/date they have requested and an outcome for the DAML request has not been concluded by authorities. Financial institutions also need to be mindful not to ‘tip off’ the client that a DAML disclosure has been made and/or a money laundering investigation is underway.

Where the transaction is allowed to proceed, financial institutions need to be mindful that despite authorities granting consent under a DAML request, this may not equate to confirmation that the client is not involved in money laundering. Firms should factor this in when deciding whether to proceed with the transaction and whether to continue providing the client banking services altogether. 

As this example shows, although it may appear relatively simple to block an account when there are concerns surrounding client account activity, the practicalities may not be quite so straightforward. 

Blocking accounts: Key takeaways

Financial institutions may want to consider some of the following when looking to block accounts in money laundering cases:

• Do your ‘Terms and Conditions’ include sufficient provisions on handling legal and regulatory obligations or cases where clients are involved in financial crime, such as blocking or closing accounts with no notice or reason?
• Are your systems and controls designed to handle situations where accounts are blocked and money laundering investigations are in motion?
• Are front line staff trained not to tip off customers that a money laundering investigation is taking place?
• Are sufficient records retained on the rationale of decisions made related to money laundering cases?
• Are investigation/compliance teams making use of all available resources when conducting money laundering investigations? This could include internal data held on clients and transactions, information in the public domain and screening tools.

To learn more, download some of our recent reports:

• The Evolving Use of Sanctions
• State of Financial Crime: Mid-Year Review 
• A Guide to AML for Digital Banks

Produced in collaboration with Dev Odedra, independent AML expert and founder of The Laundry.