§ 3.30 p.m.
§ Read a third time.
§ Clause 18 [Offences in connection with laundering money from drug trafficking]:
Lord Williams of Mostyn moved Amendment No. 1:
Page 16, line 34, leave out ("suspects") and insert ("believes").
§ The noble Lord said: My Lords, the amendments to which I am speaking relate to Clauses 18, 26 and 28, and the point is a single one. It is that a person should not be liable to be found guilty of a crime punishable by five years' imprisonment or unlimited fine merely upon the basis of a failure to report a suspicion of unlawful behaviour by others. That proposition is elementary. If the clause is enacted without amendment, we shall be close to totalitarianism.
§ The amendment is intended to be helpful. It is modest. It is offered in the spirit that the Bill would be improved if amended as we suggest. If one looks at similar legislation such as the Theft Act 1968 one sees that it is an offence to handle stolen goods knowing or believing those goods to have been stolen. Every day, in every Crown Court throughout this country, juries 318 are directed by judges that knowledge or belief of the stolen quality of the goods is required and that suspicion will not do.
§ If the clauses are unamended, the crime enacted will derive solely from a failure to disclose mere suspicion. In ancient Japan, it used to be an offence to be in possession of dangerous thoughts. If the amendment is not accepted, we shall have made it an offence to be in possession of undisclosed suspicion. That is of no practical utility in the administration of the criminal law. It will not assist to achieve the end which we all desire; namely, to stamp out drug trafficking. It is another example of ill-considered legislation which will be of no practical benefit but which will have significant disadvantages.
§ As Clause 18 presently stands, the verb "suspects" is not even qualified by the word "reasonably". The result will be that if a prospective defendant has a bare suspicion that illegal behaviour has gone on, in the sense of laundering money from drug trafficking, it will be a criminal offence —I repeat—punishable by five years' imprisonment or an unlimited fine, if that person does not disclose that bare, mere suspicion to a constable as soon as reasonably practicable. That is the point of the amendment. I repeat, if I may, that it is moved in a spirit of wanting to improve the Bill. The new offence created, if the amendment is not carried, is not needed, justified or of any practical utility. I beg to move.
§ Lord Wigoder
My Lords, I support Amendments Nos. 1 and 2 which raise, in a sense, a point similar to those contained in Amendments Nos. 3 and 4, but there are special considerations with regard to Amendments Nos. 1 or 2 which require our careful attention. It is not, at common law in this country, an offence to fail to disclose information about other people's criminal activities. It may be criticisable morally, but it is not a criminal offence to fail to disclose such activities.
There are a few statutes in which an exception to that rule is made, because, no doubt, it is felt in the public interest that the criminal activities involved are so serious that it should be made a criminal offence for people to fail to disclose their knowledge of them. There may be other statutes that deal with the point. I do not know. I am aware of two. I raise the point because it has not been adequately answered by the Minister. The two statutes are, first, this Bill which deals not with drug trafficking but with the laundering of money obtained from drug trafficking, which is a stage removed. The other statute that deals with the matter is the Prevention of Terrorism (Temporary Provisions) Act 1989 which deals with the obligation placed upon people to disclose information about terrorist activities.
No one, I suppose, could for one minute dispute that terrorist activities may be of such vast importance to the community that it is important in the public interest that there should be an obligation upon every citizen to disclose any information obtained, and that he should be criminally liable if he fails to disclose that information. That is hardly on a par with obtaining 319 information about the laundering of money obtained from drug trafficking, and yet that is the statute that we are now considering.
The Bill requires a standard of proof, where the information is merely about the laundering of drug trafficking money, of "believes" or "suspects". The far more serious case of citizens who have information, or think that they have information, about terrorist offences is dealt with in the words:A person is guilty of an offence if he has information which he knows or believes might be of material assistance … and fails without reasonable excuse to disclose that information".The standard of proof is far more rigorous where terrorist information is concerned than where information about the laundering of money obtained from drug trafficking is concerned. That appears to be totally illogical. The public of this country are entitled to look at our statute law and compare the one with another and say, "Yes, this appears to make sense. This is consistent", or, alternatively, "This is totally ridiculous". It is totally ridiculous to say of people who may have information about terrorist activities that they can be convicted on the higher standard of proof only—that they should have known or believed —whereas, if it happens to be something of much less consequence, however important it might be, such as the laundering of drug trafficking money, it suffices to say that that person should have suspected that information and failed to disclose it. The two statutes are clearly inconsistent. I venture to suggest that the prevention of terrorism legislation retains the right standard and that this Bill should be amended to come into line with it.
§ Lord Hailsham of Saint Marylebone
My Lords, I happen to take exactly the opposite point of view from the noble Lords, Lord Williams and Lord Wigoder. All thoroughly bad political reasoning depends either upon a false analogy or a false premise. This amendment is an example of both defects. The first defect is that there is some analogy between the handling of stolen goods and the offence proposed in the Bill as it stands. There is no such analogy. Clearly, it is right, and always has been right, that the offence of handling stolen goods is dependent upon belief or knowledge or the closing of one's eyes deliberately to the danger that the goods are stolen.
The other fault—the false premise—is that the offence consists of failing to disclose a bare suspicion. That is just a false premise. The offence consists in failing to disclose information or other matter on which a suspicion is based; in other words, not a bare suspicion. The question which the House has to ask itself is quite a different one; whether a responsible citizen of any kind who in the course of his business acquires the suspicion on some information or other matter fails to disclose the information or other matter on which the suspicion is based. That seems to be a self-answering question. It is the duty of a responsible citizen to disclose that to the proper quarters. I would like to see the Bill stay as it stands.
§ Lord Campbell of Alloway
My Lords, I accept wholly the spirit in which this amendment is put 320 forward. I also accept that it raises a difficult question on which there are countervailing arguments. But I come down on the side of retaining the Bill as it stands without feeling uncomfortable about supporting some form of totalitarian regime. I take the point of the noble Lord, Lord Wigoder, on his analogy, but I would seek to deal with that shortly at a later stage.
The form of the amendment is important in this context. It is two-pronged. It leaves out "suspects" and inserts "belief". It is accepted that "belief' imports the mental element of conviction which is absent in "suspicion". Other than in an exceptional case, mental state—what the accused knew, believed, suspected or intended—is a matter of inference to be drawn from the facts of the case. The test is not objective, such as what the reasonable man would have known, believed, suspected or intended. It is true that it is a heavy burden for the Crown to establish beyond all reasonable doubt on criminal standards that the accused knew; a lesser burden to prove that he suspected.
Turning to the first limb of the amendment, if the accused believed, surely he reaches a state of conviction not materially different from knowledge. Without indulging in metaphysics or a study of case law, suffice it to say that for all practical intents and purposes in the circumstances of any particular case it is difficult for a judge when directing a jury to distinguish between knowledge on the one hand and belief on the other.
Perhaps I may now turn to the second limb of the amendment, which is perhaps the main question: whether "suspects" should be deleted, a matter on which my noble and learned friend Lord Hailsham has made, your Lordships may think, some telling observations.
It is important to observe that no amendment has been tabled to delete "suspect" and insert "believe" in Section 26C, it being an adequate situation apparently that the accused should establish on the balance of probabilities (the civil burden) that he did not know or suspect. Why then should it be otherwise for the Crown under Section 26B where it has to establish knowledge or suspicion beyond all reasonable doubt, the criminal burden of proof?
One has to put the amendment in the context of the Bill as a whole and in particular of Sections 26B and 26C. Amendments Nos. 1, 2 and 3 are concerned with failure to disclose knowledge or suspicion of drug money laundering under Section 26B, whereas Amendment No. 4 is concerned with concealing or transferring proceeds of criminal conduct generally (it is a general application) and not limited to drug-related criminal conduct.
In all those cases it has to be conceded that the burden of proof rests on the Crown to establish its case beyond reasonable doubt. Even as regards Section 26B it still remains on the Crown to show that the accused had no reasonable excuse for nondisclosure under subsection (3).
Coming to the analogy points of the noble Lord, Lord Wigoder, is it really right to draw on these analogies? Surely suspicion of money laundering from drug trafficking which is not disclosed for no 321 reasonable excuse should be a criminal offence. I made these notes long before I had the advantage of hearing what my noble and learned friend Lord Hailsham had to say. I wholly agree with him. It should be a criminal offence in the situation which exists in the United Kingdom today and which is likely to persist and some even think to intensify. For these reasons, on balance, I would hope that my noble friend the Minister will not accept the amendment, although I accept that it is well intentioned and there are two sides to the argument.
§ 3.45 p.m.
§ Lord Monson
My Lords, as a layman I gladly support the first four amendments. Although the arguments for Amendment No. 4 are slightly different and stronger than those for the first three, I shall speak to them all now as shortly I have to catch a train to Edinburgh and I may not be around by the time the House reaches Amendment No. 4.
Here we have new crimes where people can be sent to prison not for sins of commission, if sins they be, but for sins of omission. No evidence of criminal intent is required by the Bill as it stands. People can be sent to prison for between five and 14 years, depending on the section in question, merely for being careless, absent-minded, too trusting, naive or for being the kind of person who is too embarrassed to kick up a fuss over what might be an extremely slight suspicion. These amendments would make it a little less likely that people would be sent to prison unjustly in the moral sense even if not in the legal sense.
§ Lord Bridge of Harwich
My Lords, I shall be brief. Surely the very essence of the offence created by the new Section 26B which Clause 18 introduces is a failure to disclose information which does give rise in the mind of the defendant to a suspicion of drug money laundering. As my noble and learned friend Lord Hailsham has pointed out, it is a matter which is about 100 miles away from the offence of receiving stolen goods.
The offence is subject to three very important safeguards as a complete protection from prosecution for a failure to disclose any information which is covered by legal professional privilege. It is a full defence if one has a reasonable excuse for failing to disclose the relevant information. Most important of all, if a suspicion is aroused in the mind of an employee, all he is required to do is to report the matter up the chain to one of his superiors. That is subsection (5) of the new Section 26B.
In those circumstances, the typical case calling for a prosecution under this clause will be that of a relatively junior official in a bank or some other financial institution who handles a financial transaction which reeks of drug money laundering and does nothing about it. Can your Lordships not picture the cross-examination of the defendant when he is giving evidence? He may be asked, "Did you not suspect that the transaction was tainted with drug money laundering?" He may answer, "Yes, of course, I suspected that it might be." "What did you do about it?" "I did nothing about it. It was not for me to 322 investigate the matter." "Surely, you must have believed that this was a drug money laundering transaction?" "No, I certainly did not believe it—suspect, yes; believe, no."
If this amendment were to be carried and I was the trial judge summing up in such a case, after reminding the jury of this passage in the cross-examination of the defendant I would say, "Members of the jury, if you think that it may be true that the defendant was telling the truth in those answers, then you must acquit him. It is only if you are satisfied so as to be sure that he is lying that you may convict him. You must be satisfied beyond reasonable doubt before you can convict him that his state of mind amounted not merely to "suspicion", but to 'belief.'" In the face of that direction, in 999 cases out of 1,000 the jury would be loyal to the judge's direction and would acquit. That is why I propose to vote against the amendment.
§ Lord Ackner
My Lords, I entirely agree with and support all that my noble and learned friend Lord Bridge of Harwich said. I wish to make only two points. First, having regard to the strength of language used by the noble Lord, Lord Williams of Mostyn, in proposing the amendment, one would have thought that the word "suspect" was not in any way used in legislation—or certainly not in this sort of legislation. The very word "suspect" is to be found in Section 24 of the Drug Trafficking Offences Act 1986 which deals with assisting another to retain the benefit of drug trafficking. It is used again in Section 14 of the Criminal Justice (International Co-operation) Act 1990, which deals with concealing or transferring the proceeds of drug trafficking. It would therefore be surprising to find that the lesser obligation on the defendant was to be found in this Bill, which is designed to make the life of the drug money launderer more difficult than at present.
Secondly, the noble Lord, Lord Williams, made the point that there is no reference to "reasonable". If the words were "had reasonable grounds to suspect", the burden would be less for the prosecution to discharge. The test then would be an entirely objective one—not what he, the defendant, suspected, but what a reasonable man would suspect. So, far from there being a complaint on that basis, this is very much in favour of the defence.
My Lords, I am bound to say that after the speeches of the noble and learned Lord, Lord Bridge, and the noble and learned Lord, Lord Ackner, I feel that there is little that I can reasonably add. I shall not, however, take the advantage of sitting down immediately because it might be a good idea if I might put the Government's point of view.
The noble Lord, Lord Williams of Mostyn, said that this was a helpful, modest little amendment. It is also a particularly persistent one because it has appeared twice before and, rather like the rotten penny, it rolls up again on Third Reading.
The noble and learned Lord, Lord Ackner, was absolutely right when he said that the whole purpose of the Bill is to try to make life more difficult for the drug money launderer and those who traffick in this 323 kind of thing. As both he and the noble and learned Lord, Lord Bridge said, there are perfectly adequate and full safeguards for any defendant.
Perhaps I may give just one example of the kind of situation with which we are dealing. A bank employee might suspect that the next-door cashier was involved in money laundering. As the Bill is drafted, if that employee suspects that another person is involved in drug money laundering, he must report his suspicions to his line manager. If the amendment were to be accepted, it would mean that only if that employee knows or believes that the other person is involved in drug trafficking must he report it to his line manager. If he just suspects, he need not do so.
The reason for the new offence created by Clause 18 of failing to report knowledge or suspicions of money laundering is to ensure that the police are given every possible opportunity to collect information about money laundering and to investigate suspicious transactions. If suspicions are not reported, the ability of the police to tackle money launderers and therefore to tackle drug traffickers effectively will be severely hampered. I find it hard to believe that the noble Lords who tabled these amendments really intend that it should be a defence for a bank employee, who is charged with an offence under this clause, to say that he only suspected the cashier next to him was engaged in money laundering. The fact that the clerk could not say that he believed that he was money laundering although he jolly well suspected that he was would get him off. Worse than that, the police would have been denied the opportunity of investigating something suspicious—and, after all, that is what the police are always doing. That is what they are skilled at and that is what they are professional at. It is much better for the police to investigate something suspicious than to rely on employees to check out their suspicions first and then determine whether they are tantamount to belief.
Perhaps I may remind your Lordships that employees have a very straightforward way of acting on a suspicion. It is specifically recognised in this clause. It enables them to protect themselves from any risk of prosecution, and at the same time ensure that any facts which might indicate money laundering reach the enforcement authorities whose job it is to investigate them. Employees may report up the line to their supervisor, in accordance with subsection (5). That is what we hope they will do.
Our defences against money laundering and drug trafficking —which depend on a steady flow of information—will be seriously weakened if the incentive to report suspicions is reduced, as it would be if your Lordships were to approve these amendments. The employees of financial institutions already make disclosures to the enforcement authorities on the basis of suspicions in order to protect themselves and their employers from liability to prosecution under Section 24 of the Drug Trafficking Offences Act 1986. Clause 18 simply builds on that existing incentive to report suspicions, albeit with greater force.
I find it hard to agree with the noble Lord, Lord 324 Wigoder, who said at Report stage that Section 24 of the Drug Trafficking Offences Act was a less relevant precedent than certain provisions in anti-terrorist legislation. Section 24 of the 1986 Drug Trafficking Offences Act is, in effect, the parent of Clause 18. We are introducing Clause 18 as a supplement to it, especially to ensure that our legislation exactly conforms to the terms of the European Community directive. That is one of the purposes of the Bill.
Perhaps I may quote from Article 7 of the European directive. It states that member states shall ensure that credit and financial institutions refrain from carrying out transactions which they know or suspect to be related to money laundering. If we are to comply with the terms of the directive I venture to suggest to your Lordships that we really must use the test of "knowledge or suspicion" which appears in Article 7. If we fail to do that, it will mean that we shall be unable to meet our obligations under the directive, apart from the fact that it will weaken our defences against laundering. I therefore hope that, even if the noble Lord, Lord Williams of Mostyn, finds it difficult to accept the other arguments of which I have tried to persuade him on about three occasions, he will accept this one. If we do not use those words, we are not complying in full with the directive.
The noble Lord, Lord Wigoder, referred to the position on terrorism. He said that it is totally ridiculous that terrorism should be dealt with on the higher standards of knowledge or belief but money laundering on the lower standard of suspicion. I respectfully suggest to the noble Lord that there is a world of difference between that section about terrorism and the clause under discussion. Section 18 of the Prevention of Terrorism Act applies to everyone, but Clause 18 of the Bill concerns only those who come across suspicion in the course of trade, employment and so forth.
When the Prevention of Terrorism Act was drawn up it was decided that it would be unreasonable to expect everyone, particularly those who are living in Northern Ireland where terrorist activity is unfortunately rife, to report every activity of their friends, their family or their neighbours which they felt might be suspicious but which nevertheless fell short of a belief that they had been involved in a matter of terrorism. Suspicions about money laundering which are covered in Clause 18 are different because they only apply to those in the work context. That is reasonable and fair. Suspicion was agreed to be the right test when the anti-money laundering legislation was first introduced in 1986. I suggest to your Lordships that it is still the right test.
§ 4 p.m.
§ Lord Williams of Mostyn
My Lords, the noble and learned Lord, Lord Hailsham of Saint Marylebone, accused me of incorrect analysis. He was supported in that suggestion on the basis that handling stolen goods was 100 miles away from the question presently being discussed. There is no incorrect analysis. The mere physical handling of stolen goods is no crime. It depends on the specific mental element—knowledge or belief that the goods were stolen. Similarly, a failure 325 to disclose information of itself is not the offence. It is information which is known or suspected to be of relevance.
The amendment for which we contend is simply that there should be knowledge or belief before the sanction of the criminal law falls. The noble Earl, Lord Ferrers, spoke of the bank clerk and the teller at the adjacent desk. The words are wider than that:information, or … knowledge or suspicion",which comes to a prospective defendant,in the course of his trade, profession, business or employment".Those are wide words.
The noble Earl spoke of a disincentive to report suspicions. There is no disincentive in a well-run organisation. There is no disincentive to the moral obligation. What we simply suggest, with great respect, is that one should not base criminal liability with penal sanctions on the basis of a bare suspicion that information is in the mind which ought to be disclosed as being relevant to drug money laundering. That is why the analysis, though faulty, is faulty elsewhere and not with us. In the circumstances we are of the view that we should test the opinion of the House.
§ 4.4 p.m.
§ On Question, Whether the said amendment (No. 1) shall be agreed to?
§ Their Lordships divided: Contents, 66; Not-Contents, 149.326
|Division No. 1|
|Addington, L.||Listowel, E.|
|Airedale, L.||Llewelyn-Davies of Hastoe, B|
|Ardwick, L.||McIntosh of Haringey, L.|
|Aylestone, L.||Mackie of Benshie, L.|
|Beaumont of Whitley, L.||McNair, L.|
|Blackstone, B.||Mallalieu, B.|
|Bonham-Carter, L.||Merlyn-Rees, L.|
|Broadbridge, L.||Milner of Leeds, L.|
|Bruce of Donington, L.||Molloy, L.|
|Callaghan of Cardiff, L.||Monson, L.|
|Carter, L.||Morris of Castle Morris, L.|
|Clinton-Davis, L.||Morris of Kenwood, L.|
|Cocks of Hartcliffe, L.||Mulley, L.|
|David, B.||Nicol, B.|
|Dean of Beswick, L.||Perry of Walton, L.|
|Donaldson of Kingsbridge, L.||Portland, E.|
|Ennals, L.||Prys-Davies, L.|
|Falkland, V.||Rea, L.|
|Fisher of Rednal, B.||Redesdale, L.|
|Gallacher, L. [Teller.]||Richard, L.|
|Geraint, L.||Ritchie of Dundee, L.|
|Gladwyn, L.||Seear, B.|
|Glenamara, L.||Serota, B.|
|Graham of Edmonton, L. [Teller.]||Strabolgi, L.|
|Thomson of Monifieth, L.|
|Hampton, L.||Tordoff, L.|
|Harris of Greenwich, L.||Turner of Camden, B.|
|Hilton of Eggardon, B.||Underhill, L.|
|Holme of Cheltenham, L.||Varley, L.|
|Jeger, B.||White, B.|
|Jenkins of Hillhead, L.||Wigoder, L.|
|Jenkins of Putney, L.||Williams of Elvel, L.|
|John-Mackie, L.||Williams of Mostyn, L.|
|Ackner, L.||Alexander of Tunis, E.|
|Addison, V.||Alport, L.|
|Ailsa, M.||Annan, L.|
|Aldington, L.||Astor, V.|
|Banbury of Southam, L.||Long, V.|
|Belhaven and Stenton, L.||MacAndrew, L.|
|Bessborough, E.||Mackay of Clashfern, L.|
|Birdwood, L.||Macleod of Borve, B.|
|Boardman, L.||Manchester, D.|
|Bolton, L.||Mancroft, L.|
|Borthwick, L.||Marlesford, L.|
|Boyd-Carpenter, L.||Merrivale, L.|
|Brabazon of Tara, L.||Mersey, V.|
|Braine of Wheatley, L.||Monk Bretton, L.|
|Bridge of Harwich, L.||Montagu of Beaulieu, L.|
|Brightman, L.||Morris, L.|
|Butterworth, L.||Mottistone, L.|
|Cadman, L.||Mountevans, L.|
|Caithness, E.||Munster, E.|
|Campbell of Alloway, L.||Murton of Lindisfarne, L.|
|Campbell of Croy, L.||Nathan, L.|
|Carnegy of Lour, B.||Nelson, E.|
|Carnock, L.||Norfolk, D.|
|Chelmsford, V.||Norrie, L.|
|Clark of Kempston, L||O'Cathain, B.|
|Cockfield, L.||Orr-Ewing, L.|
|Coleraine, L.||Oxfuird, V.|
|Colnbrook, L.||Park of Monmouth, B.|
|Constantine of Stanmore, L.||Parkinson, L.|
|Cox, B.||Pender, L.|
|Cranborne, V.||Platt of Writtle, B.|
|Crickhowell, L.||Plumb, L.|
|Cross, V.||Plummer of St. Marylebone, L.|
|Cullen of Ashbourne, L.||Porritt, L.|
|Dacre of Glanton, L.||Rankeillour, L.|
|Denham, L.||Rayleigh, L.|
|Downshire, M.||Reay, L.|
|Eccles of Moulton, B.||Renton, L.|
|Effingham, E.||Renwick, L.|
|Ellenborough, L.||Rodger of Earlsferry, L.|
|Elles, B.||Rugby, L.|
|Elliot of Harwood, B.||St. Davids, V.|
|Elliott of Morpeth, L.||Saint Oswald, L.|
|Elphinstone, L.||Sandys, L.|
|Elton, L.||Savile, L.|
|Faithfull, B.||Selborne, E.|
|Ferrers, E.||Shaughnessy, L.|
|Finsberg, L.||Shrewsbury, E.|
|Fraser of Kilmorack, L.||Simon of Glaisdale, L.|
|Gainford, L.||Soulsby of Swaffham Prior, L.|
|Gisborough, L.||Spens, L.|
|Glenarthur, L.||Stanley of Alderley, L.|
|Goschen, V.||Stewartby, L.|
|Hailsham of Saint Marylebone, L.||Strathcarron, L.|
|Halsbury, E.||Strathcona and Mount Royal, L.|
|Hanworth, V.||Strathmore and Kinghorne, E. [Teller.]|
|Harvington, L.||Sudeley, L.|
|Hayter, L.||Swansea, L.|
|Hemphill, L.||Swinfen, L.|
|Henley, L.||Terrington, L.|
|Hesketh, L. [Teller.]||Teviot, L.|
|Hooper, B.||Thomas of Gwydir, L.|
|Hothfield, L.||Thurlow, L.|
|Howe, E.||Trumpington, B.|
|Hylton-Foster, B.||Ullswater, V.|
|Ilchester, E.||Vaux of Harrowden, L.|
|Ingrow, L.||Vivian, L.|
|Ironside, L.||Wade of Chorlton, L.|
|Jenkin of Roding, L.||Wakeham, L.|
|Joseph, L.||Waterford, M.|
|Kimberley, E.||Westwood, L.|
|Kinnaird, L.||Wilson of Langside, L.|
|Lauderdale, E.||Wise, L.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ 4.12 p.m.
§ [Amendment No. 2 not moved.]
§ Clause 26 [Assisting another to retain the benefit of criminal conduct]:327
§ [Amendment No. 3 not moved.]
§ Clause 28 [Concealing or transferring proceeds of criminal conduct]:
§ [Amendment No. 4 not moved.]
§ Clause 33 [Meaning of "inside information"]:
Lord Spens moved Amendment No. 5:
Page 34, line 36, leave out ("significant").
§ The noble Lord said: My Lords, Amendment No. 5 deals with Clause 33(d). Essentially it is a clause based on a false premise, to borrow a phrase from the noble and learned Lord, Lord Hailsham. I have never understood why the premise is allowed to exist. The false premise is that there is some mysterious linkage between information, or the lack of it, and the price of a security in the market place. It is a premise which has dogged me for the past five years and it needs to be examined.
§ Any merchant banker will explain that there have been days when he has been summoned by chairmen of client companies to explain why it is that after the publication of good results his share price has gone down. It is something that few company chairmen understand if they are not in the market place. But the Stock Exchange does not work on the basis of today's time; it works on the basis of future time. In other words, it deals in expectation. If the expectation is not satisfied then it is perfectly possible for the share price to go down. That explanation seems to be understood by few people outside the stock market.
§ As a banker who has been involved in writing prospectuses, offer documents, rights issue documents and all sorts of issue documents—over the past 30 years I have probably written more than 300—it is a relatively simple point of view to take regarding price sensitive information, which is the easier way of defining it. Price sensitive information is information which ordinarily would have been disclosed in a prospectus, had a prospectus been about to be written. That is probably as good a definition as any that exists.
§ I suspect that by using that definition there has been a dramatic shift in the burden of proof. I know from my experience how that dramatic shift in the burden of proof can have a serious effect. It is not generally known but the allegations against the defendants in the Guinness trials were based on market support allegations. The implication was that the price had been moved, or at least had not gone down. In the last four weeks of that bid the price went up by some 20 per cent. and that was used to demonstrate that the huge alleged market support operation had had some significant effect.
§ In practice that is not exactly what happened. On 14th March 1986 the noble Lord, Lord Lawson, introduced his Budget, which contained two material facts. One was a cut in the rate of income tax by 1 per cent. and the other was no increase in excise duty on alcohol. The effect of that budget was to move the share price of all the brewery stocks upwards by similar amounts. Whitbreads, Bass Charringtons, and Allied Breweries all moved in that direction over the same period of time.
That led to an argument over what exactly a false
market was. There is a Stock Exchange definition of a false market, which I shall read because it is important in the context of what I am about to say. The Stock Exchange definition is contained within the rule book for all members and reads:
A 'false market' is defined as a market in which a movement of the price of a share is brought about or sought to be brought about by contrived factors, whether by the operation of buyers and sellers acting in collaboration with each other or otherwise, calculated to create a movement of price which is not justified by assets, earnings or prospects".
In order to make the charges stick, that specific problem had to be dealt with. It was dealt with by Mr. Justice Henry in the following way. On day 91 of the first Guinness trial he said,
If it stopped after the third line, it would seem [to] me to be quite a good definition. The whole seven lines seem to me to be a rather bad definition … it seems to me to be, as a definition of a false market, a nonsense. If it ended after the third line, I could understand it".
He finalises his conclusions by saying,
But the law has its own definition of the false market and it is not this definition".
Therefore, for many years the Stock Exchange has been operating on a definition of a false market that simply is not recognised by the law. For that mistake four people went to prison and were fined in excess of £11 million; so the phrase that we are discussing has an important effect.
§ The reason the difficulties arise is because of the word "significant". "Significant" is a qualifying adjective—one of the bugbears of the law. Again, I can illustrate the problem by what happened to me. There were some 300 days of court appearances in the Guinness trial; approximately 10 per cent. of those were taken up in discussions on various qualifying adjectives. The biggest problem that arose was in relation to the adjectives in Sections 151 and 153 dealing with "purpose". Section 153 contains the remarkable sequence of phrases, "for the purpose", "principal purpose" and "larger purpose" all in the same sentence. That is really quite an achievement.
§ The Lord Chancellor has just published his consultative paper on long criminal trials which is essentially about the Guinness trials. He talks about delay and costs in that paper and I do not know where he gets his figures from. All I can say is that of the 30 days involved in discussing qualifying adjectives of various kinds, 15 days were spent dealing with specific qualifying adjectives. Those 15 days were at a cost to me of £5,000 a day and a cost to everyone involved of £750,000. That is the price we pay for inserting a word which has no meaning.
The equivalent word in the Guinness trials, and one very often used, was "material"—the disclosure of a material fact. It was the second leg which was the principal target of the allegations. Perhaps I may tell the House what Mr. Justice Henry said about the word "material", because it is interesting in relation to the word "significant."
The word 'material' is not defined in the Act".
That is the in the Prevention of Fraud (Investments) Act 1958.
It is an ordinary English word. I would define it simply as a fact of such significance as might reasonably affect a shareholder's decision whether to assent the Guinness offer.
Setting out that test with the help of the ordinary dictionary definition, I believe myself to be saying substantially the same as Section 146 of the Financial Services Act 1986 when dealing with a comparable problem. The section states that,
all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of [it]".
That definition is probably as near as one will get to the price sensitive definition that I have just given about prospectuses.
As to the word "significant", the noble Earl, Lord Caithness, said last week:
The question then turned to what constitutes a significant effect on the price of securities. That will depend on the facts". [Official Report, 3/12/92; col. 1501.]
If it is to depend on the facts, may we have a statement from the Government that that is the case? I can tell the House exactly what happens. The moment we say that, the prosecution will simply say, "This is a significant movement, a significant effect on the price." The defence is then left to disprove it. The judge will rule—because he has to rule, otherwise he does not have a trial—on whether or not the facts are capable of being interpreted by a jury as significant. So we are left with the dictionary definitions on which Mr. Justice Henry fell back. The Concise Oxford Dictionary definition reads:
significant: having a meaning; expressive; suggestive; with pregnant or secret sense; inviting attention; noteworthy; of considerable amount or effect or importance; not insignificant or negligible".
The Shorter Oxford Dictionary, which is in two volumes, states in volume II:
significant: full of meaning or import; important; notable; signifying something; expressive or indicative of something; something which conveys or expresses a meaning [like] a sign, symbol, indication".
That is very little help, I suspect, to any jury, even if those dictionaries were available.
§ What does it all mean? We do not need the word "significant". It is perfectly clear what price-sensitive information is. If we take the word out, it will do something to restore the balance in the clause. If the word remains in the Bill, any defence would be quite capable of demonstrating that there never had been any significant effect, whatever "significant" may mean. A great deal of time will be wasted and very little achieved. I beg to move that the word be omitted.
§ Lord Clark of Kempston
My Lords, I wish to ask my noble friend to resist the amendment because the word "sigificant" attached to insider dealing is only proved when the value of the security increases. Whoever is the insider, a director or whoever, he has inside knowledge. If the word "significant" is omitted, many directors of companies will have information about the cash flow, about prospects and what the sales forecasts are. That in itself cannot be considered to be "significant". The word "significant" only becomes important when a share price increases and people who have inside knowledge make a profit from it.
I wonder whether the noble Lord, Lord Spens, realises that if his amendment were accepted, the provision would not read well. The wording of the 330 amendment should have been to leave out "a significant" and insert the word "an", because one cannot have "a effect".
§ Lord Simon of Glaisdale
My Lords, I doubt very much that it makes any difference whether or not the word "significant" is in the Bill. There is a fundamental axiom of the law which is practically always expressed in Latin but which means that the law takes no account of insignificant matters. I am generally against putting unnecessary words in a Bill, but this is just one word and it would save argument. Therefore, I hope that the noble Earl will resist the amendment. It seems on balance that it is better that the word "significant" should remain in the Bill.
The Earl of Caithness
My Lords, this amendment, moved by the noble Lord, Lord Spens, is not, in the words of my noble friend Lord Ferrers when he dealt with the first amendment, a "rotten penny". This one has not come back. It comes to your Lordships for the first time at a Third Reading debate.
The prohibitions in Part IV apply to someone who possesses information which is likely to have a significant effect on the price of securities. The requirement, which has a counterpart in our existing legislation, serves to ensure that the prohibitions on insider dealing apply to major matters such as impending takeover bids, forthcoming profits and dividend announcements which are out of line with expectations. These are the stuff of insider dealing as it is commonly understood. These are the stuff to which the prohibitions should apply.
The amendment seeks to cast the net wider. It would, in the words of the noble Lord, Lord Spens, delete the qualifying adjective. It would bring within the ambit of the legislation dealing where someone possessed information that was likely to have any effect on the price of securities.
One possible consequence of adopting such an approach would be that there were many technical breaches of the law because of dealings by people who possessed information likely to have only a trivial effect on the price of securities. That would not be satisfactory; it would either lead to a host of prosecutions where there is no real mischief or the law would fall into disrepute.
A second and in many ways more serious possible consequence of the amendment could follow. It is likely to inhibit important and legitimate communication between a company and investment analysts and fund managers. It is generally agreed that these contacts can play a useful role in enabling analysts and fund managers to obtain a better understanding of the company and its management. It is also accepted that significantly price sensitive information should not be disclosed at such meetings and indeed the effect of the Bill as it stands is to prohibit this. It would, however, be very difficult for such meetings to take place if the insider dealing prohibitions were extended to apply to information which was likely to have any effect on the price of securities as the amendment proposes: the risk of disclosing "inside information" would he too great. It is likely therefore that broadening the law in the way 331 proposed by the amendment would effectively stop the dialogue between companies and investors and analysts.
I put it to the House that the effect of this amendment would be not to increase the number of real villains caught within the ambit of the legislation but it would put at risk important and legitimate activities. I shall read with care what the noble Lord, Lord Spens, had to say on this matter because much of what he said was detailed and needs examination. However, I felt we were right to advise the House that this amendment ought to be resisted and I received support on that from my noble friend Lord Clark and the noble and learned Lord, Lord Simon of Glaisdale.
§ 4.30 p.m.
§ Lord Spens
My Lords, I am grateful to the noble Earl, Lord Caithness, for that reply. However, he referred to something that I am not at all sure is at present covered by the law of the land; that is, a price movement outside expectations. I have just demon-strated that that has been overruled by the courts, so there is no such thing as an expectation in that regard.
As regards the noble Earl's second point, on inside information and the problems that people who deal in shares may have, I have this to say. For many years we have all been conscious of this problem. Way back at the very start of my career it was made clear to me that in a corporate finance department, where there is always inside information, any dealings in stocks and shares would lay one open to accusation. The burden of proof had already shifted to people having to prove that they did not know, for example, that ICI was about to make a bid, even though that knowledge was available in the department. There are many people who do not own shares and who do not deal in shares but who are open to such allegations. I imagine the same provision would apply to fund managers and analysts, although I do not think that is the case. There can be no harm in a situation where all inside information and all price sensitive information renders it possible that any dealing in shares can be exposed as criminal. The simple answer is not to deal. However, having listened to what the noble Earl said, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
An amendment (privilege) made.
My Lords, I beg to move that the Bill do now pass.
We have come to the end of an important Bill. I am grateful to all noble Lords who have contributed to our debates, in particular to those noble Lords who have extended our vocabulary and imagination by the use of exotic new words, such as "flabbergastee", or new questions such as "tippee or not tippee"? We are grateful to the noble Lord, Lord Wigoder, for that, as it were, extra-curricular intellectual stimulation. I suspect—although I dare say the noble Lord, Lord Williams of Mostyn, and the noble Baroness, Lady Mallalieu, would prefer me to know or believe—that your Lordships are glad that one of the main results of your Lordships' characteristically meticulous scrutiny 332 is that we have decided that "tippee is not tippee". The noble Lord, Lord Airedale's man in the street will at least rejoice in that, even if he finds, on the balance of probabilities, that the standard of proof applicable to civil proceedings remains to him, the man in the street, incomprehensible, and even if to lawyers it is as clear as daylight.
I am particularly grateful to the noble Lords, Lord Airedale, Lord Wigoder and Lord Harris of Greenwich, and to the noble Baroness, Lady Mallalieu, all of whom left their distinctive mark on Part I by persuading the Government—and their apparently intransigent Minister, as the noble Baroness, Lady Mallalieu, will recall—to consider, and to accept, proposals which they put forward. These changes have smoothed away some of the problem areas and have made the Bill somewhat easier to understand. The man in the street will be grateful for that, too.
I was also grateful to your Lordships for the support given to the general thrust of Parts II and III of the Bill, which deal with confiscation of the proceeds of drugs and other crime, and with money laundering. I am glad that your Lordships decided, after some fairly detailed discussions on a number of occasions, not to dilute the pretty tough regime which is proposed in the Bill.
Part II of the Bill is aimed at those people who make vast profits from supplying drugs to others, and am grateful to your Lordships for the support given to the principle of being tough on drug traffickers and of curtailing their financial incentive.
Although Ministers rarely admit it, I was glad for the amendments to Parts II and III which were tabled by some of your Lordships. They enabled me to explain more fully the need for Part II and III and the Government's intentions. Part IV of the Bill brings law on insider dealing into agreement with the European Community directive on the subject, and I am most grateful to my noble friend Lord Caithness for having taken the heat of the debates on that very technical part of the Bill. It was here that the word "tippee" was finally tipped out of the Bill. I am also grateful to many other noble Lords who have contributed to these often technical discussions.
The provisions in this Bill, when they are implemented, will significantly increase the powers which are available to deal with those who take part in so-called white collar crime, and with those who participate in the world-wide traffic in drugs, spreading misery and profiting from human dependency. With your Lordships' help, this Bill, I think, strikes a proper balance between the demands of justice and fairness, and the need to provide our law enforcement authorities with adequate powers to tackle the threats to society which are posed by drug traffickers, money launderers, insider dealers and fraudsters.
Moved, That the Bill do now pass.—(Earl Ferrers.)
§ Baroness Mallalieu
My Lords, from these Benches I thank the noble Earl for being somewhat less intransigent than, at stages in this Bill, I have accused him of being. I also thank other noble Lords who have 333 contributed to the Bill, in particular the noble Lord, Lord Williams of Mostyn. They have contributed to some significant improvements in the Bill.
On Second Reading I was concerned that Part I of the Bill was incomprehensible to anyone but a lawyer, and even then contained a number of possible interpretations. I should like to think that the noble Earl has agreed to amendments which have made things rather better in that respect. I am bound to say that there are some areas which may need to be examined closely in another place, in particular the provisions in the final part of the Bill in relation to insider dealing. In his heart of hearts the noble Earl will appreciate that those provisions may need further clarification. However, I am most grateful to him for the courtesy with which he has responded to the amendments raised from this side of the House.
§ Lord Wigoder
My Lords, as regards Parts I, II and III of the Bill, those of us in all parts of the House who have any kind of legal qualifications have en-deavoured to assist by making various contributions. We have been very much aided by noble Lords who do not have legal experience and whose contributions are perhaps all the more important for that reason.
I am sure that all of us will join in saying how grateful we are to the noble Earl, Lord Ferrers, for the patient and careful way he has listened to amendments being proposed, for the detailed consideration he has given to them and for the sympathetic way in which he has responded. I wish that I could say the same about the noble Earl, Lord Caithness. I cannot, because, for practical purposes, he has had almost no amendments to respond to and practically no contributions to deal with.
I exempt at once from that observation the noble Lord, Lord Mottistone, who has enabled us to learn of the CBI's views on various aspects of the Bill, but I have an uneasy feeling that the House may not have done itself justice in its consideration of Part IV—the insider trading part—of this important Bill. It is a highly technical subject on which the legislation in the past few years has repeatedly caused difficulties through its wording. It is crucial that the net that is cast by the clauses in that part of the Bill should be neither so wide as to sweep up people who should never be included at all, nor so narrow as to enable people who should be included to escape its provisions.
It is very much a matter for the expertise of Members of your Lordships' House who have vast experience in the worlds of financial services, insurance, banking and, indeed, commerce and industry generally. I am sad to see that, from the end of the Second Reading stage until today, not one contribution was made, as I understand it, by any of your Lordships with that skill and ability. Had that been so, we might perhaps have produced a rather better Part IV of the Bill than now exists.
Curiously, too, there has been a singular shortage of written contributions from bodies outside the House. I received a short submission from a firm of City solicitors just as the Bill began its Second Reading. There was then a deathly silence until an hour or two before Report stage when it was far too 334 late to do anything. I received a detailed submission from the Group of 100, which, as your Lordships will know, is a rather informal gathering of the finance directors of the top British companies, expressing collectively their serious reservations about not only the wording but some of the substance of the provisions in Part IV of the Bill. I had no alternative but to suggest to them that they might care to take their points to another place and have the matter debated there. I should not want the absence of discussion of Part IV of the Bill to lead the Government to think that Part IV is therefore absolutely word-perfect and will not be challenged in any way when the Bill reaches another place.
I reiterate my gratitude to the noble Earl for the way in which he has handled this matter. I and my colleagues look forward to following the progress of the Bill in another place in due course.
§ Lord Mottistone
My Lords, I sympathise greatly with the comments of the noble Lord, Lord Wigoder, but I should particularly like to thank my noble friend Lord Caithness for the great care that he took in dealing with the relatively few amendments that were produced for us to consider. I thought that he did an excellent job in trying to clarify the situation and I hope that the meetings that I know will take place between his department and those people who are involved will develop matters speedily enough for them to be included in the Bill before it leaves Parliament altogether.
The problem that has to be overcome—and people like the noble Lord, Lord Spens, can perhaps help us give the matter greater prominence—is that those in the City do not understand that your Lordships have such an important contribution to make in sorting out legislation. They need to understand how and when to go about making representations. It is only the really experienced bodies of trade associations and the like that get going fast enough to tell us what they want. The City is particularly ill-informed in this matter. I repeatedly invited the CBI to obtain more information, but one did not have much time. It is rather a pity that, as the noble Lord, Lord Wigoder, said, this House, with its great expertise in all these fields, could not have been used to greater effect. However, that does not mean to say that my noble friend Lord Caithness did not do a jolly good job.
On Question, Bill passed, and sent to the Commons.