E01059
MONEY LAUNDERING — penalty of £1,000 imposed on appellant for failure to obtain satisfactory evidence of identity of customers — whether reasonable excuse for failure or mitigating circumstances warranting reduction of penalty — on facts no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

ALI NEKOOI	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: David Demack (Chairman)
Marilyn Crompton

Sitting in public in Manchester on 31 July 2007

The Appellant appeared in person
 
Richard Chapman, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal by Mr Ali Nekooi against a decision on review by Her Majesty’s Commissioners for Revenue and Customs (“the Commissioners”) to uphold a penalty of £1,000 imposed on him under Regulation 20 of the Money Laundering Regulations 2003 (“the Regulations”).
2.	Mr Nekooi appeared in person, and the Commissioners were represented by Mr Richard Chapman of counsel.  Mr Chapman produced a bundle of copy documents, to which we added a few other documents supplied by Mr Nekooi.  We took oral evidence from Mr G W Cuthbert, the Commissioners’ review officer.
3.	The facts are agreed and may shortly be stated in the following way.
4.	Mr Nekooi trades as Daruosh Exchange and carries on business as a money transmitter from his supermarket premises at Infirmary Road, Sheffield.  He was registered as a money service business on 1 August 2004.  As a money transmitter, he is permitted to send and receive funds from within and outside the UK provided the requirements of the Regulations are met.  
5.	On 4 May 2005, Mrs Horsfield, an officer of the Commissioners, visited Mr Nekooi and explained the requirements of the Regulations to him.  She followed up the visit with a letter on 6 May 2005, highlighting the requirements of the Regulations.  
6.	On 23 January 2006, Mrs Horsfield again visited Mr Nekooi.  She inspected his records and found various irregularities in them.  She therefore wrote to Mr Nekooi on 27 January 2006, pointing out with explanations that he had failed to:
“Obtain satisfactory evidence of the identity of your customers (regulation 4) where:
•	They conducted a single transaction of €15,000 or more
•	They conducted a transaction which appeared to be linked and the total amount would or might exceed €15,000.

With regards to the transactions which have been deposited into your bank account via internet banking it was identified that you have accepted a one off transaction in the sum of £73,609.45 from a Mr Harooni and several payments from a Mr Kashani between July and December 2005 which have amounted to £11,725 and have therefore exceeded the €15,000 limit.  In both of these cases you have not obtained any customer evidence of identification.  The Money Laundering Regulations 2003 require you to obtain satisfactory customer ID for transactions of this value.  In this instance, you should have taken a minimum of two forms of ID, usually a passport or driver’s licence with a recent utility bill.

	Retain satisfactory evidence of identity, where required for five years (regulation 6).
•	Keep a record containing details relating to all transactions carried out by a customer (regulation 6).
After inspecting your records, it was noted that you were not keeping a complete audit trail of transactions carried out by your customers.  Other than the two customers who had conducted their transactions face-to-face you have not maintained a record of transactions including the name and address of the customers carrying out the transactions.  Just keeping a record of your bank statements is not adequate.  

I must remind you that you are required to maintain a record of all transactions, regardless of whether the ID of the customer has been taken, for a minimum of five years.” 

7.	Following a visit on 13 and 14 July 2006, Mr Rebane, another officer of the Commissioners, by letter of 20 July 2006, informed Mr Nekooi that he was satisfied that Mr Nekooi had failed to obtain satisfactory evidence of the identity of customers when they conducted a single transaction of €15,000 or more, or conducted transactions which were linked and the total amount exceeded €15,000.
8.	By a further letter dated 20 July 2006, but in fact sent on 14 August 2006, Mr Rebane notified Mr Nekooi that he would be penalised for the following breaches of the Regulations:
(a)	Three sums, of £2,000 (6 February 2006), £8,000 (10 March 2006), and £2,000 (13 April 2006), were paid into Mr Nekooi’s account by Yadzi Carpet Co UK without evidence of identity other than a compliments slip.  
(b)	Three payments, of £3,000 (15 March 2006), £2,600 (22 March 2006) and £1,000 (11 April 2006), were made into Mr Nekooi’s account by a Mr Mohammad Kharanzi, the only evidence of identity of Mr Kharanzi obtained being a poorly faxed copy of his driving licence on which it was impossible to identity his name and address.  
(c)	A sum of £14,985 was paid into Mr Nekooi’s account on 2 March 2006 (wrongly stated in the letter to have been on 2 February 2006) without his obtaining any evidence of identity of the customer, but who was believed to be Belgian.  
9.	A notice of penalty of £1,000 was given to Mr Nekooi on 14 August 2006.  
10.	In a handwritten note, which the Commissioners received on 23 August 2006, Mr Nekooi replied:
“As I explain to you when you came to see me on the day you visited me.  All the money which has been paid to the account is accounted for and below is the explanation and copy of the transaction(s) which are enclosed and as far as the £14985 mentioned in your letters there is an ID copy of the page which is enclosed.  This should satisfy your inquiry and if you have any further inquiry please do not hesitate to contact me at my address … Please note that there is no failure in our operation as you mention in your visit.  We do not have ID card for all our transaction if it is not more than (£9,000) any how all the transaction are accounted for and I am ready to produce all the document which is necessary.”
11.	By letter of 22 October 2006, Mr Nekooi effectively requested that the decision to penalise him be reviewed.
12.	On 13 November 2006, Mr Cuthbert as Review Officer, upheld the Penalty in respect of the linked transactions of 6 February 2006, 10 March 2006 and 13 April 2006 (“the Yazdi Carpet Transactions”) and the single transaction of £14,985 on 2 March 2006 which has since been identified as that of a customer named Mr Khabbazian (“the Khabbazian Transaction”).
13.	Mr Nekooi appealed the decision on review on 12 December 2006, giving the following reasons for doing so:
“The identity of the person in question was known to me as I stated in my letter and as I mention in my letter a copy of [?] his identity was available and would be forwarded if need a letter is enclosed.”
14.	It is common ground that the tribunal has full appellate jurisdiction in dealing with the penalty, regulation 22 of the Regulations providing as follows:
“On an appeal from any decision by the Commissioners on a review under regulation 21, the tribunal have the power to:-
(a)	quash or vary any decision of the Commissioners, including the power to reduce any penalty to such amount (including nil) as they think proper; and 
(b)	substitute their own decision for any decision quashed on appeal.”
15.	Mr Chapman explained the effect of the underlying legislative framework which we may summarise in the following way:
(1)	Regulation 2(2)(d) provides for the Regulations to be applicable to businesses transmitting money;
(2)	Regulation 3 provides for every person in the course of a relevant business to comply with the requirements of, inter alia, Regulation 4;
(3)	Regulation 4 provides the identification procedures to be adopted in respect of one off or linked transactions in the total sum of €15,000 or more;
(4)	Paragraphs 9.9 and 9.10 of the Commissioners’ Notice MSB2 suggest that the best forms of identification evidence are a combination of primary identification such as a full passport and identity card or full driving licence, or a full driving licence and secondary identification such as credit cards, bank account statements or a recent utility bill;
(5)	At Paragraph 31 of their Notice MSB1, the Commissioners accept that there is no liability for a penalty where there is a reasonable excuse, but maintain that acting in good faith and being unable to pay are not reasonable excuses; and
(6)	At Paragraph 22 of Notice MSB1 the Commissioners accept that penalties can be reduced if there are mitigating circumstances falling short of a reasonable excuse, but say that acting in good faith and lack of funds are not normally accepted.  
16.	Mr Chapman submitted that the penalty should be confirmed because:
(1)	Mr Nekooi had provided no explanation for his failure to obtain any identification in respect of the Yazdi Carpet Transactions.
(2)	The only explanation Mr Nekooi had offered for the Khabbazian Transaction was that Mr Khabbazian was recommended by a friend, that identification was forwarded after the transaction in the form of a photograph of his driving licence, and that the transfer was through a Swedish bank.  Mr Chapman maintained that that was unsatisfactory for the following reasons:
(a)	The Regulations did not absolve Mr Nekooi from compliance merely because the transaction was through a bank (see Regulation 3(1) – the duty is upon “every person” acting in the course of a relevant business)
(b)	Regulation 4(3)(c) provides that where satisfactory evidence of identity is not obtained, the business relationship or one-off transaction must not proceed any further: identification must be provided before a transaction rather than after it.
(c)	In any event, a photograph of a driving licence alone is insufficient as a further primary or secondary form of identification would have been needed.
(3)	Mr Nekooi failed to take account of the greater potential for money laundering which arose when a  customer was not physically present when being identified (see Regulation 4(3)(b).  The Yazdi Carpet transactions and the Khabbazian transaction were not face to face transactions.  
(4)	Mr Nekooi had an educational meeting on 4 May 2005 followed by a letter on 6 May 2005, a further meeting on 23 January 2006 followed by a warning letter on 27 January 2006, an opportunity to respond following the meeting on 13 and 14 July 2006, and a warning letter on 20 July 2006.  He had thus been given ample opportunity to comply with the Regulations.
(5)	The previous meetings had themselves revealed irregularities for which no penalty had been imposed.  
(6)	The maximum penalty was £5,000 per transaction.  The total penalty of £1,000 was proportionate, and in fact relatively modest.
17.	Mr Chapman maintained that “reasonable excuse” was effectively shorthand for Regulation 20(2) which provides that: 
“The Commissioners must not impose a penalty on a person where there are reasonable grounds for them to be satisfied that the person took all reasonable steps for securing that the requirement would be complied with.”
18.	He submitted that Mr Nekooi had put forward no arguments or evidence to show that he had taken reasonable steps to ensure that the requirements were complied with.  In any event, he further submitted, as he took no steps at all, he could have no reasonable excuse.  There ought to be no reduction of the penalty on the basis of reasonable excuse.  Further, Mr Chapman claimed, Mr Nekooi had put forward no arguments or evidence in respect of any mitigating factors, so that again the penalty should not be reduced.  
19.	Mr Nekooi acknowledged his various breaches of the Regulations before us, and merely invited us to reduce the penalty as being excessive.  He claimed to have learned his lesson from the events with which we are concerned, and suggested that leniency was appropriate, as he was a relative newcomer to the money transfer business.
20.	We enquired of Mr Chapman the basis on which the Commissioners had concluded that £1,000 was the appropriate level of penalty, the Regulations providing for a maximum penalty of £5,000 for each breach of them, but containing no minimum level.  In response, those instructing Mr Chapman produced a copy of the Commissioners’ Notice MLR1, Guidance on Penalties and Prosecutions.  Paragraph 3.6 thereof suggests that a penalty of £1,000 should be imposed for a second failure by a trader to check the identification of a customer for suspicious or large (exceeding €15,000) transactions, rising to £2,500 for a third default, and £5,000 for a fourth default.
21.	In the instant case, Mr Nekooi has been guilty of a number of defaults so that had the Commissioners applied their own guidance to the letter, he would have found himself facing a penalty of £5,000.  Having considered the matter most carefully, and find him to have no reasonable excuse or to have advanced any mitigating factors, we conclude that the penalty imposed was not unreasonable, and we therefore confirm it.  We dismiss the appeal but make no direction as to costs.

DAVID DEMACK
CHAIRMAN
Release Date: 14 August 2007
MAN/06/8058