Under the Proceeds of Crime Act introduced last year, if you suspect dodgy practices on site but keep shtoom, the authorities will see you as the criminal
It will come as a surprise to all involved in construction and to their legal advisers as well as to construction adjudicators and arbitrators to learn about the impact that the recent extension of "tipping off" legislation will have on them. The Proceeds of Crime act, which has been in force since 24 February 2003, is aimed at rooting out crime and the laundering of the proceeds of crime. The relevant part is entitled "Money Laundering", which makes it sound like criminal law geared only to international drug pushers and terrorists. However, the legislation is so widely drafted that it also covers shady dealings that sometimes take place near a building site.

The background to the legislation is the growth in large-scale international crime, which in turn has generated huge profits that then need to be salted away. Investigating such crime, particularly in an electronic era, has become more difficult.

To counter these developments, the law has been slowly changed to make it easier for the authorities to obtain information about these activities and to stop their lifeblood: the financing of the criminal activities and the disposal of their proceeds. Like many slow-burning developments in the law, the cure sometimes develops in unexpected ways. Many will regard the proceeds of crime act as being one such unexpected development.

The act is wide-ranging because of the large number of differing situations embraced by the extensive definition of the criminal conduct that it covers. The act's overall objective is to require anyone coming into contact with the proceeds of any crime, however innocently or innocuously, to report his or her suspicions to a newly constituted reporting body, the National Criminal Intelligence Service. This organisation will itself, or by referral to other investigating authorities, investigate the suspicious movement of funds.

To ensure that any potentially criminal activity is reported, anyone who has a suspicion that he or she is or may be about to participate in an activity concerned with the proceeds of crime commits a criminal offence if that person does not report it. That person may not tip off the possible criminals once the NCIS has been informed and may not continue with the activity that may be assisting in the disposal of criminally gained funds unless authorised by NCIS.

What you know could hurt you
You may still be wondering what this has got to do with a building site. To explain, I must quote the relevant parts of the act. These state that a person commits an offence if he or she enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person. The act defines criminal property to be property that constitutes a person's benefit from criminal conduct or represents such a benefit (in whole or part, directly or indirectly) and the alleged offender knows or suspects that it constitutes or represents such a benefit.

In short, a third party concerned with an arrangement relating to criminal property commits a criminal act unless that act is reported in advance to NCIS. He must not disclose the fact of the tip-off to anybody including a client or employer if that disclosure would be likely to prejudice any investigation that might be conducted following the tip-off.

The third party bystander must allow NCIS seven days to respond to the tip-off. The NCIS must notify the tipper within this period whether it intends to permit or refuse consent to the proposed prohibited act. If the tipper is told that NCIS consents to the prohibited act being performed, the act may be performed without further ado. If NCIS notifies its refusal, there is a moratorium period of 31 days from the receipt of the refusal notice during which the tipper may not perform the prohibited act.

Now stand back and consider how many construction operations involve or might involve fraudulent, dishonest or suspicious acts and how many involved in construction become involved in tax evasion, deliberate overcharging, tender manipulation, price fixing arrangements, unlawful employment practices or the deliberate skimping on specified standards to save time or inflate profits. Let me take three hypothetical situations.

Consider how many construction operations might involve fraudulent, dishonest or suspicious acts and how many people become involved in tax evasion, deliberate overcharging, tender manipulation, price fixing arrangements …

First, a tender build-up is manipulated so as to load certain preliminary items and artificially reduce others with the intention of recovering the reduction during the work without giving credit for the inflated items. That practice might be fraudulent and, if so, in claiming and receiving payment of the recovery of the reduced elements of the tender, the contractor commits an offence.

Second, a subcontractor is not registered appropriately for tax purposes and is paid gross, a contractor is paid in cash or is not making full and prompt NI or tax contributions, deductions or declarations, or invoices are manipulated to allow VAT either not to be paid when it should be or to be reclaimed on apparently zero-rated work which is not zero-rated. Alternatively, any employer seeks an invoice, certificate or valuation "for my funder", which is made up in a way that is not wholly in tune with the valuations and flow of funds on site.

Third, a contractor employs illegal immigrant labour, requires labour to work in excess of the number of hours permitted by the working time directive, does not comply with health and safety legislation, making financial savings as a result, or turns a blind eye to unlawful, labour-only subcontracting arrangements.

All of these situations give rise to the possibility of there being criminal property that is the subject of a criminal arrangement. The criminal property that might arise could include the money that is saved in evaded tax or social security contributions or has been recovered as remuneration under the building contract in connection with excess profits, illegally worked hours or illegally employed labour. The criminal arrangement would be the claiming for and certification of those sums or the subsequent claims for and determinations relating to those sums in a final accounting exercise, adjudication or arbitration.

It could be you
Who are the persons who might "enter into or become concerned in an arrangement that facilitates by whatever means the acquisition, retention, use or control of" the criminal proceeds of tax evasion, unlawful employment or tendering practices? Clearly, they can include construction professionals who value work or issue certificates, claims consultants concerned with putting together or evaluating claims, contract surveyors working with payment claims from suppliers and subcontractors, gang foremen concerned with exemption certificates or record-keeping for working time directive purposes, or adjudicators or arbitrators concerned with making decisions or awards about payments, which are or may be criminal proceeds in the extended definition. It must be remembered that the act contains no cut off or minimum size of the proceeds in question, even the evasion of £10 worth of tax would be liable.

I have not referred to legal advisers, whether in-house or in private practice and whether barrister, solicitor or other legal professional. All are, of course, subject to the act but these persons, unlike non-lawyers, have some limited exemption from the full rigours of its restrictions. As members of professional bodies, such as the Bar Council or the Law Society, they would already have been issued detailed guidelines and advice on how to proceed in situations covered by the tipping-off requirements of the act. However, trade associations and professional bodies concerned with contractors, suppliers, adjudicators, arbitrators and construction professionals do not seem yet to have considered the full ramifications of the act or to have issued guidance to their members about it.

It may be surprising to adjudicators and arbitrators to learn that they are involved in these reporting obligations. The reason is that they are or may be "a person who becomes concerned with an arrangement which facilitates the acquisition of criminal property" by issuing an award or a decision where the sums awarded include provision or an allowance for monies which are associated with tax evasion, unlawful tendering processes, illegal employment practices or the like. The dispute resolver needs only to be someone who "knows or suspects" that the arrangement (the decision or award) will facilitate the acquisition or retention of proceeds of crime.