Since 9/11, the threat of terrorist action against the UK has been repeatedly invoked by the Government to justify legislation, the draconian nature of which might have met with approval from Robespierre and the Committee of Public Safety. The Committee adopted measures intended to protect the life of the French nation, which at the time was seen as at immediate risk. At a subliminal level, the linkage of the terrorist threat with financial crime has enabled legislation to be enacted that in other circumstances would be considered illiberal and at odds with constitutional freedoms.

A striking example is the reporting obligation imposed on the regulated sector under section 330 of the Proceeds of Crime Act 2002 (POCA). The foundation for this is the imposition of criminal liability for entertaining (unreported) suspicion. This is a novel area of significant legal risk to the UK financial services sector.

The provision is derived from, and materially identical to, section 21A of the Terrorism Act 2000 introduced in the aftermath of 9/11 in December 2001 under the Anti-terrorism, Crime and Security Act 2001. The imposition of a maximum sentence of five years' imprisonment for failing to report suspicion that another is involved in financing terrorism may be understandable. The same penalty for failure to report mere suspicion of the laundering of the proceeds of any crime is disproportionate.

By operating in terrorem of the financial services industry and the legal profession the effect has been to provide law enforcement agencies with an enormous volume of financial information disclosed under suspicious activity reports (SARs) whether or not the suspect transaction was illegitimate. The ELMER database now holds somewhat short of a million reports.

The government policy paper 'Financial challenge to crime and terrorism' of February 2007 states that financial information is one of the most powerful investigative and intelligence tools available, "the true potential of which is only now being fully understood". The dissemination and use of the information held on the ELMER database is now a stated law enforcement priority. In many cases that use will not be the original purpose for which a SAR disclosure was made. Schedule one, paragraph five of the Data Protection Act 1998 requires that personal data processed for any purpose shall not be kept for longer than is necessary for that purpose.

In Australian Communist Party v Commonwealth [1951] the great Australian judge Owen Dixon remarked that "[h]istory, and not only ancient history, shows that in countries where democratic institutions have been unconstitutionally superseded, it has been done not seldom by those holding executive power." Made in the context of a different perceived threat, the observation resonates in recent judgments of English judges. Judicial resistance to the greater excesses of the Government's response to the oft-repeated terrorist threat following 9/11 and its readiness to curtail individual freedoms is seen in A v Secretary of State [2005].

The House of Lords held the indefinite detention without trial of foreign nationals to be unlawful, Lord Hoffmann observing: "of course the Government has a duty to protect the lives and property of its citizens. But that is a duty which it owes all the time and which it must discharge without destroying our constitutional freedoms. There may be some nations too fragile or
fissiparous to withstand a serious act of violence. But that is not the case in the UK."

In A v Secretary of State [2006] the House of Lords overruled the Court of Appeal holding evidence obtained by torture to be inadmissible in the courts of the UK, regardless of its origin and the circumstances in which obtained. The fact that it was possible to conclude otherwise shows how far the fear of terrorism had infected the body politic.

Outside influence

The power of the fear of terrorism to subvert the rule of law has been starkly illustrated in Corner House Research v DPP [2008]. The court held unlawful the decision to discontinue the investigation by the serious fraud office (SFO) into BAE Systems' Al-Yamamah contract. It was common ground that in 2006 Prince Bandar of Saudi Arabia had said to Jonathan Powell, then Tony Blair's chief of staff, that unless the SFO stopped looking at certain Swiss bank accounts, intelligence and diplomatic relations 'would be pulled'.

On 8 December 2006, Blair asked the Attorney General Lord Goldsmith to consider public interest issues in continuing the investigation, saying there was a 'real and immediate risk of a collapse in UK/Saudi security, intelligence and diplomatic co-operation. This is likely to have seriously negative consequences for the UK public interest in terms of both national security and our highest priority foreign policy objectives in the Middle East.' On 14 December 2006, Lord Goldsmith announced the decision to discontinue the investigation by the SFO in his statement to the House of Lords saying: "it has been necessary to balance the need to maintain the rule of law against the wider public interest".

Lord Justice Moses and Mr Justice Sullivan expressed dismay that the law was powerless to resist the specific and successful attempt by a foreign government to pervert the course of justice in the UK by causing the investigation to be halted. The court said that so bleak a picture of impotence of the law invites at least dismay, if not outrage. In an unusual interference with matters of high policy traditionally treated with deference by the courts, Moses said: "those who wish to deliver a threat designed to interfere with our internal domestic system of law need to be told that they cannot achieve their objective." While the ratio of the decision is that the director of the SFO failed to recognise that, absent necessity, he should not yield to threats, the court did not shy away from commenting that the threat may not have been the real ground for the decision at all, but rather a useful pretext.

New order

On 24 April 2008, in A, K, M, Q, & G v HM Treasury [2008], Mr Justice Collins quashed the Terrorism (United Nations Measures) Order 2006 and Al-Qaida and Taliban (United Nations Measures) Order 2006 made under the United Nations Act 1946. Both orders were made under the Orders in Council procedure. There is no means under the 1946 Act for the orders to receive Parliamentary scrutiny. The orders were made pursuant to Security Council resolutions intended to suppress terrorist financing by asset-freezing. The resolutions require that states freeze the assets of individuals on lists maintained by the UN Sanctions Committee. Thereafter assets cannot be used without a licence. The orders displaced fundamental rights, there being no effective mechanism for an individual to challenge listing.

Further, under the Taliban Order, the Treasury was empowered to list a person as a 'designated person' merely upon reasonable grounds for suspicion. Collins held that the order went further than the UN resolution required. The judge said that not only was suspicion an inappropriately low test for listing, but, further, the orders failed to satisfy the requirement of legal certainty. The very wide definition of economic resources made it impossible for the family of a designated person to know whether they would commit an offence or a licence was required. (Treasury officials had had to deal with applications for licences for A, K and M on about 50 occasions, including one where the issue was whether a loan of a car to the applicant to obtain groceries was permitted.)

In terms that will resonate with those who have had to consider making an SAR under the POCA, Collins said that since the possible penalty on conviction is severe, "the concerns are understandable". In a welcome statement of principle, he said: "The purpose of asset-freezing is to ensure that funds are not made available for terrorist purposes. Thus any criminal liability which could fall on those who make assets available to a designated person should depend on whether it was or ought to have been known to the supplier that the asset in question could result in funds being available for terrorist purposes. That at the very least seems to me to be an appropriate limitation on criminal liability."

It is instructive to consider that statement against the risk to conscientious professionals presented by sections 328 and 330 of the POCA. An obvious distinction is that exposure to criminal liability is here imposed by primary legislation. But neither of these provisions received satisfactory Parliamentary scrutiny, not least because both were derived from existing legislation, but addressed to quite different circumstances.

The writer's view is that for too long the express linking by government of terrorism and financial crime has lent a doubtful legitimacy to measures that in other times would have been considered to be an unjustifiable interference with individual freedom. Furthermore, to echo the Corner House decision, the reasons given by government for securing the disclosure of high volumes of financial information under SARs, and the interest of the executive and law enforcement agencies in obtaining this, are by no means necessarily one and the same.

Paul Marshall is a tenant at 4-5 Gray's Inn Square.