16 March 2015

Investing in Africa - POCA and FCA obligations

This article was written by Gregg Beechey (Partner) and Helen McEwan (Trainee Solicitor).

UK based Fund Managers need to be alert to the Proceeds of Crime Act and their ongoing regulatory obligations.

UK based private equity or other fund managers investing in Africa should be alert to possible money laundering offences under the UK Proceeds of Crime Act 2002 ("POCA"). Criminal liability could arise if fund managers invest in African entities that do not comply with local or international law, for example, not holding the requisite local regulatory licenses. The fund manager's approved persons should also be aware of their ongoing obligations to the Financial Conduct Authority (“FCA”) when considering making such investments, necessitating a more stringent level of due diligence at an initial stage of the transaction.

Money laundering

Using the example of investing in an unlicensed or unregulated target entity in Africa, the offence of money laundering is a serious consideration.  Money laundering is broadly defined under POCA as any act which involves dealing with “criminal property” – which is defined very broadly. Investing in unlicensed entities could constitute an offence in the UK under POCA which may therefore expose the manager to criminal liability in the UK.

Investing in unlicensed entities could involve committing an offence or becoming concerned in an offence of “converting” criminal property, “facilitating the use or control of” criminal property or “acquiring” criminal property – the principal money laundering offences. If this were the case then a notification to the National Crime Agency ("NCA") would be necessary in order to obtain clearance to proceed with the transaction - in effect 'cleansing' the transaction.

This obligation is not confined to the regulated sector and attaches to all persons in the UK so would apply to individuals including, without limitation, the directors or partners and all persons involved in the decision making process of the transaction.

Fund managers should be aware that where no notification is made to the NCA the sanction is criminal, so they could be liable for a fine or imprisonment or both (although, depending on the severity of the offence, this is unlikely in practice).

Disclosure obligations

Under POCA there is a mandatory disclosure obligation where any suspicion of money laundering – which is also defined extremely broadly – comes to the attention (or should have come to the attention) of a person in a firm within the course of its business in the regulated sector.

The regulated sector is defined under POCA essentially as those authorised and regulated by the FCA. Under POCA it is an offence to fail to make the required disclosure as soon as is practicable to the firm’s nominated money laundering reporting officer (“MLRO”) or to the NCA. Therefore, if the manager is operating in the regulated sector (as they normally will be) this mandatory disclosure obligation will attach to it, including all individuals within the firm if, on a subjective basis, they know or suspect that another person is engaged in the broadly defined offence of money laundering.

If the manager is not in the regulated sector (for example is a charity of perhaps a development finance institution (or is funded by either of these) where funds are essentially gifted rather than invested) then this disclosure obligation only attaches to an individual within the firm if an MLRO has been appointed (which will very much be subject to an individual firm’s governance). In such a case, disclosure to the MLRO will be required by any individual within the firm if he knows or suspects that another person is engaged in the broadly defined offence of money laundering.

Approved persons’ obligations

In addition, if the manager is in the regulated sector any individuals who are approved persons should be alert to their ongoing obligation to comply with the FCA's “Fit and Proper” test. An approved person is an individual who has been approved by the FCA to perform one or more controlled functions (e.g. a director or a partner or investment manager or adviser) on behalf of an authorised firm. When considering a candidate’s fitness and propriety, the FCA considers: honesty, integrity and reputation; competence and capability; and financial soundness.

The FCA has provided a non-exhaustive list of relevant matters that they will take into account when determining an approved person’s honesty, integrity and reputation and it does not matter whether the relevant matter took place in the UK or elsewhere. The matters to which the FCA will have regard include: 

  • Whether the person has been involved with a company, partnership or organisation that has been refused registration, authorisation, membership or a license to carry out a trade, business or profession.
  • Whether the person, or any business to which the person has been involved has been investigated, disciplined, censured or suspended or criticised by a regulatory or professional body, a court or Tribunal, whether publicly or privately. 

The FCA will also consider whether the person’s reputation might have an adverse impact upon the firm for which the controlled function is to be performed. 

If a fund manager were to invest in an unlicensed entity in Africa (even where it may not be entirely clear whether the license is required or the precise reasons for it not having been obtained) this may impact on the manager’s approved persons’ ongoing obligations to the FCA and they would need to disclose the transaction to the FCA. Failure to disclose could provide evidence of the approved person's failure to comply with the “Fit and Proper” Test and non-compliance with these regulatory responsibilities may result in the FCA taking enforcement action against the approved persons.

Conclusion

If a UK based fund manager invests in an unlicensed African entity such an activity could constitute a criminal offence under POCA. Therefore, an important consideration for fund managers is POCA, its consequences and the manager’s ongoing obligations to the FCA.  

When carrying out local due diligence, these elements may not be at the forefront of an investment executive’s mind but it is important to be aware of the potentially far-reaching consequences it not complying with a UK-based managers' POCA and FCA obligations.

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