Briefing

DAMLs and DATFs: Navigating UK sanctions and AML/CTF risk

Sanctions compliance is currently at the forefront of the regulatory agenda for many businesses operating in complex or conflict-affected markets. However, parallel sets of obligations, under the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks, must not be overlooked. Where a transaction raises sanctions concerns, it can also engage obligations under the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TACT). In certain circumstances, a business may need to seek a formal “defence” from the UK Financial Intelligence Unit (UKFIU) within the National Crime Agency (NCA) before proceeding with a payment or transaction.

This briefing explains the circumstances in which a Defence Against Money Laundering (DAML) or a Defence Against Terrorist Financing (DATF) may be required, the critical differences between the two mechanisms, and how sanctions exposure can trigger these obligations.

Background

The principal money laundering offences under sections 327 to 329 of POCA prohibit, respectively:

concealing or converting criminal property;
entering into an arrangement which facilitates another person’s acquisition, retention, use or control of criminal property; and
acquiring, using or possessing criminal property.

Under POCA, “criminal property” is property that constitutes or represents a benefit from criminal conduct (i.e. conduct that would constitute an offence in any part of the UK).

The principal terrorist financing offences under sections 15 to 18 of TACT prohibit fund-raising for the purposes of terrorism; use and possession of terrorist funds; entering into funding arrangements; and money laundering of terrorist property. “Terrorist property” means money or property likely to be used for the purposes of terrorism, or which constitutes the proceeds of acts of terrorism.

Both sets of offences are capable of being committed by regulated and unregulated entities alike, and they operate independently of sanctions law. Critically, they can be engaged even where the relevant counterparty is not itself listed on any sanctions list.

DATF vs. DAML: the critical distinction

A DATF is a request submitted to the UKFIU by a business that suspects a proposed transaction may result in a terrorist financing offence under TACT. The threshold is suspicion, or reasonable grounds to suspect, that property may be terrorist property. The position need not be proven, and the concern need not be established with certainty.

A DAML is a request submitted to the UKFIU by a business that suspects a proposed transaction may result in a money laundering offence under POCA. There is a timing difference when compared with the DATF regime: under the UKFIU’s guidance, criminal property must already exist at the point the DAML is submitted.¹ A DAML cannot be sought on the basis that funds may only become criminal property after the transaction has taken place.

This distinction has important practical consequences. Where the concern is that a payment might engage TACT, but the position on ownership or control remains uncertain, a DATF is likely the appropriate mechanism, since the suspicion of terrorist financing can be established without crystallised criminal property. A DAML may separately be appropriate where a sanctioned person’s involvement is such that the criminal property analysis is already satisfied, but operators should not assume that a DATF analysis will automatically support a DAML.

The interaction with sanctions

Three scenarios commonly arise at the intersection of sanctions and the AML/CTF frameworks.

First, where a counterparty is directly designated under UK sanctions, a licence from the Office of Financial Sanctions Implementation (OFSI) will generally be required before funds or assets can be dealt with. A DAML does not replace this obligation, and the UKFIU guidance makes clear that a DAML does not absolve a reporter of the separate requirement to contact OFSI where assets are those of a designated person.
Second, where a counterparty is not directly designated but is owned (or controlled) by a sanctioned person, UK, EU and US sanctions may treat the entity as though it were designated itself. In this scenario, the sanctions risk and the POCA/TACT analysis are closely intertwined and must each be assessed independently.
Third, and most challenging, is where ownership or control by a sanctioned or terrorist-connected entity is uncertain and contested. Operators should note that OFSI will not itself make determinations on questions of ownership and control and will refer enquiries on this point back to the operator. The decision as to whether to proceed with a payment or transaction rests with the operator, and must be supported by its own assessment, evidence and legal advice.

Practical checklist

The following steps should be considered by any business which is considering making a payment which gives rise to sanctions or terrorist financing concerns:

Screen all counterparties for direct designations and indirect connections to sanctioned persons, including through ownership and control chains.
Determine whether OFSI engagement or a licence is required separately and independently of any DATF/DAML analysis.
Assess whether suspicion of terrorist financing arises under TACT. If so, consider submitting a DATF promptly. Proof is not required, only reasonable grounds to suspect.
Consider the DAML position: criminal property must exist at the time of submission. Do not assume the DATF and DAML analyses will yield the same conclusion.
Record-keeping: maintain a contemporaneous record of all due diligence, regulatory engagement, advice received and decisions taken.
Seek legal advice early: the interaction between sanctions, POCA and TACT is complex and fact-specific, and early engagement allows for a co-ordinated regulatory response.

For more information, please contact our Sanctions, Regulatory and Compliance Team.

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