Supreme Court update: overseas dealing in criminal property does not fall within scope of POCA

Overview

In El-Khouri v Government of the United States of America¹, the UK Supreme Court has held that money laundering offences under sections 327-329 of the Proceeds of Crime Act 2002 (POCA) do not have extra-territorial effect. The decision reverses the Court of Appeal's controversial judgment in R v Rogers & Ors (2014)², which had held that 'dealing with' criminal property in Spain was an offence under section 329 POCA. The Supreme Court's decision in El-Khouri also provides welcome clarification of the correct approach to the transposition exercise required when assessing 'double criminality' in the extradition context. We explore, below, the background to the Supreme Court's decision, its conclusion, and implications.   

Background

The Supreme Court's decision arose out of a request from the United States of America to extradite Mr El-Khouri, a dual UK-Lebanese national residing in the UK, for alleged insider dealing involving companies listed on US stock exchanges. Mr El-Khouri was alleged to have received inside information and traded, via a UK broker, contracts for difference (CfDs) which depended on the price of NYSE-listed companies. As such, most of Mr El-Khouri's conduct was in the UK, but its effect was felt in the US.

It was agreed by the parties that the alleged conduct, if proved at trial in the UK, would have amounted to a UK offence. The UK Financial Conduct Authority had initially investigated, but closed their case on the basis that there was insufficient evidence to prosecute.

The High Court authorised the extradition, which was upheld on appeal. The Supreme Court allowed Mr El-Khouri's appeal, and quashed the extradition order.

Double criminality

At his extradition hearing, Mr El-Khouri argued that the alleged conduct did not satisfy the double criminality requirement - i.e. the rule that the conduct alleged in the request must constitute an offence under the laws of both the requesting (US) and requested (UK) states – under section 137 of the Extradition Act 2003 (EA 2003). The rule is intended to protect requested persons from the exercise of "exorbitant foreign jurisdiction".

Section 137 provides separate tests depending on whether the conduct occurs in the requesting state's territory (section 137(3) EA 2003) or outside (section 137(4) EA 2003).

• where the conduct occurs in the requesting state's territory, the Court must assess whether the conduct would constitute a UK offence if it occurred in the UK;
• where the conduct occurs outside the requesting state's territory, the Court must assess whether, in corresponding circumstances, equivalent conduct would constitute an extra-territorial offence in the UK.

The Court observed that the two tests are intended to be mutually exclusive - i.e. the conduct must be regarded as having occurred either in or outside the requesting state's territory. However, it recognised that the distinction can be difficult to apply to cross-border criminality.

Where did the conduct occur?

Although most of Mr El-Khouri's alleged activity was said to have occurred in the UK (for example the provision of inside information and the trading of the CfDs), the US sought to argue that the alleged conduct occurred in the US. The US relied on Lord Hope's dicta in Cando Armas³, which held that conduct could be interpreted as occurring "in" the requesting state even if the person is not physically present in that territory, provided the effects of their conduct are intentionally felt there⁴.

The primary issue was therefore determining where the alleged conduct took place. The Court revisited the dicta in Cando Armas, and determined that for extradition purposes the relevant test is where the person's acts specified in the extradition request were physically done; the court is not concerned with where any consequences of those acts occurred or were felt.

The Court concluded, on the facts, that Mr El-Khouri's conduct had occurred outside the US, and therefore the proper test was section 137(4) EA 2003.

Applying the transposition test in extra-territorial cases

As explained above, most of Mr El-Khouri's conduct had occurred in the UK. This raised the question of how the court should approach the 'transposition' exercise required by section 137(4) of assessing whether "in corresponding circumstances, equivalent conduct would constitute an extra-territorial offence in the UK".

The House of Lords explained that it is necessary for these purposes to construct a "mirror image" of what actually occurred. Where relevant acts occurred outside the territory of the requesting state, they should be assumed to have occurred outside the UK, and vice versa.

In Mr El-Khouri's case, therefore, because the 'dealing' and other conduct occurred outside the US, the corresponding hypothetical was that they had occurred outside the UK. The Court had to ask itself whether, if Mr El-Khouri's alleged conduct had occurred outside the UK, it would have been an insider dealing offence.

Since the UK insider dealing offences are confined to circumstances where either the offender is in the UK when dealing, or deals on a UK regulated market, or uses a UK professional intermediary, the double criminality test was not satisfied.  

Rogers reversed

A secondary issue, of arguably greater importance and of more frequent relevance to those considering the risk of money laundering liability under POCA, arose in relation to an alternative argument made by the US. Having failed to establish that Mr El-Khouri's alleged conduct would (when transposed) amount to insider dealing, the US argued that it would amount either to fraud or money laundering under section 329 of POCA (acquisition, use, possession etc). This argument was also dismissed by the Court.

Under section 329, a person is guilty of an offence if they acquire, use, or possess criminal property, defined as property constituting or representing (directly, or indirectly and whether in whole or in part) a person's benefit from criminal conduct, and that person knows or suspects that it constitutes such a benefit. Criminal conduct is defined under section 340(2) POCA as conduct that: (i) constitutes an offence in the UK; or (ii) would constitute an offence in the UK if it occurred there. Thus, for POCA to be engaged, the criminal conduct which forms the underlying, or "predicate", offence in respect of which the criminal property in question represents the benefit, does not have to have taken place in the UK. However, POCA is silent in respect of the jurisdictional position with regard to substantive money-laundering activity (under the offences set out at sections 329 to 329).  

The question of whether POCA has extra-territorial effect of this type arose in Rogers. In that case, a defendant was convicted of a money laundering offence under section 327 POCA (concealing etc) after allowing criminal proceeds, obtained by fraud committed in the UK, to be paid into and withdrawn from his Spanish bank account. On appeal, the Court of Appeal rejected arguments that the relevant acts were committed in Spain, and held that the English courts had jurisdiction on the basis of section 340(11)(d) POCA – the wording of which provides that "money laundering is an act which would constitute an offence (including one under section 327) if done in the UK"⁵. indeed, the Court held that it would be surprising if Parliament had not intended POCA to have extraterritorial effect.

The Court of Appeal's reasoning in Rogers was based on the language of POCA, but it said that it would also have reached the same conclusion based on an alternative argument relating to the UK nexus of the predicate fraud offence – because the money laundering continued the harmful consequences of the fraud in the UK.

The judgment in Rogers, which has been binding authority on lower courts in several extradition cases, had attracted controversy and much criticism, as it implied that the conduct element of a money laundering offence need not take place in the UK. This conflicted with the presumption that Parliament does not intend for criminal laws to have extra-territorial effect without express provision to the contrary.

Notably, the Court in El-Khouri at [72]-[82], held that Rogers was wrongly decided, and that section 340(11) POCA neither creates an offence itself nor changes the territorial scope of section 329. It simply provides a definition of "money laundering" for the purposes of separate 'failure to report money laundering' offences. The Court dismissed the argument that sections 327-329 POCA have extra-territorial effect. The only extra-territorial effect of section 340(11) is to bring within the scope of the offences created by sections 327-329 relevant acts of dealing in the UK with criminal property that represents the proceeds of criminal conduct committed abroad. The Court concluded that to come within the territorial scope of section 329 POCA, the acquisition, use or possession of criminal property must itself occur in the UK. The Supreme Court held that the Court of Appeal appeared to have "lost sight of this point in concluding that converting criminal property in Spain was an offence under [POCA]"⁶.

Commentary

The Supreme Court's interpretation and clarification of the territorial scope of the principal money laundering offences is welcome, given the controversy surrounding Rogers and confusion it has caused. It is clear that, when assessing whether conduct falls within scope of POCA, the focus is on the place in which the 'dealing' in criminal property itself occurred, and overseas laundering of overseas crime is not a UK offence. As the Court observed, "[t]hat would be a truly exorbitant extra-territorial jurisdiction for the United Kingdom to assert and the Act does not assert it"⁷.  

For the avoidance of doubt, POCA continues to have extra-territorial effect in the sense that the POCA offences can apply even where the predicate conduct occurs overseas. Thus:

• Where a person commits an offence abroad, which would be an offence in the UK had it occurred here, and deals in the proceeds resulting from that conduct in the UK (e.g. converting monies obtained from a US-based fraud in a UK bank account) then POCA applies.
• By contrast, POCA does not apply where both the dealing and criminal conduct occur abroad.
• Where the predicate conduct occurs in the UK and the dealing occurs abroad (e.g. converting the proceeds of a UK-based fraud in a US bank account), then POCA prima facie does not apply. That said, there might be acts of laundering before the proceeds leave the UK and/or some scope for the alternative theory of jurisdiction discussed in Rogers (in a case where a substantial measure of the laundering takes place in the UK). Companies will also need to continue to consider money laundering laws in other relevant jurisdictions.

In respect of the 'failure to report' offences under sections 330-332 POCA, businesses, which are in the UK regulated sector for the purposes of POCA, are still required to disclose that they know or suspect (or have reasonable grounds for knowing or suspecting) that another person is engaged in money laundering:

• even if the predicate conduct takes place outside the UK (as long as it would have been an offence if it occurred here); and/or
• even if the money laundering conduct occurs outside of the UK (as long as it would have been a money laundering offence if it had occurred here and that it is it is also unlawful in the country where it occurred). This reporting obligation has not changed following El-Khouri.  

Finally, those involved in extradition cases will welcome the Supreme Court's clarification of the appropriate distinction between section 137(3) and 137(4) of the EA 2003, and the correct approach to the transposition test in each case.