Legal professional privilege and SAR reporting: when the exemption applies

Solicitors operate under two competing legal obligations: the duty to report suspicions of money laundering under the Proceeds of Crime Act 2002 (POCA), and the duty to maintain the confidentiality of privileged communications with clients. Getting the boundary wrong in either direction carries serious consequences — failing to report when you should is a criminal offence under section 330 of POCA, while disclosing genuinely privileged material may breach your professional duties and expose you to negligence claims.

This guide explains how the privilege exemption works in the context of suspicious activity reporting (SAR), when it applies, and when it falls away. It is aimed at fee earners and Money Laundering Reporting Officers (MLROs) who need to make practical decisions about whether a particular piece of information triggers a reporting obligation or is protected by privilege.

What the privilege exemption says

Section 330(6) of POCA provides that the obligation to report does not apply to information or other matter that came to a professional legal adviser in privileged circumstances. This is the statutory carve-out that recognises the fundamental importance of legal professional privilege in the common law system.

Information is received in privileged circumstances if it is communicated or given to the professional legal adviser:

• By a client, or by a client's representative, in connection with the giving of legal advice to the client, or
• By any person in connection with legal proceedings (or contemplated legal proceedings)

Both limbs of the test require a genuine connection to the provision of legal advice or to legal proceedings. Information communicated in a purely commercial or administrative context — even between solicitor and client — is not covered.

The crime/fraud exception

The privilege exemption contains a critical limitation. Section 330(11) of POCA provides that information is not received in privileged circumstances if it is communicated or given with the intention of furthering a criminal purpose. This is sometimes called the "iniquity exception" or the "crime/fraud exception".

The criminal purpose does not need to be that of the client. If any person communicates information with the intention of furthering any criminal purpose, privilege does not attach. In practice, this means:

• A client who seeks legal advice on how to structure a transaction specifically to disguise the proceeds of crime is not communicating in privileged circumstances, even if the solicitor does not initially realise the purpose
• A third party who provides information to the solicitor as part of a fraudulent scheme is not protected by the exemption, even if the client is innocent
• Where the solicitor becomes aware (or suspects) that the legal advice is being used to further a criminal purpose, the privilege exemption falls away from that point

The intention to further a criminal purpose need not be proved to a criminal standard before you decide to report. If you have reasonable grounds to suspect that the information was communicated to further a criminal purpose, the exemption does not apply and you must report.

What privilege does and does not cover

Understanding the boundary requires distinguishing between different types of information a solicitor encounters in practice.

Typically privileged (exemption likely applies)

• Instructions from a client explaining their personal circumstances and seeking advice on their legal position
• Advice given to the client on whether a proposed course of action is lawful
• Communications between solicitor and client for the dominant purpose of litigation
• Information shared by the client when seeking advice about potential exposure to criminal proceedings

Typically not privileged (exemption unlikely to apply)

• Information obtained through your own due diligence enquiries (source of funds checks, company searches, land registry results)
• Your own observations about a transaction that raise suspicion (unusual payment patterns, pressure to complete quickly, changes to the buyer at a late stage)
• Information from third parties who are not seeking legal advice (estate agents, mortgage brokers, other side's solicitors acting in their own capacity)
• Pre-existing documents handed to you by the client that were not created for the purpose of seeking legal advice
• Information communicated in a non-legal capacity (e.g., where the solicitor is acting as a property agent or financial adviser rather than giving legal advice)

Practical decision framework

When you encounter information that gives rise to a suspicion, work through the following questions before deciding whether to report.

Step 1: Is this information from a privileged communication?

Ask: did this information come to me from my client (or their representative) in connection with my giving them legal advice, or from any person in connection with legal proceedings? If the answer is no — for example, you discovered the concern through your own CDD enquiries or from a third-party source — the privilege exemption does not apply. Report to your MLRO.

Step 2: Was the communication made to further a criminal purpose?

If the information did come from a privileged communication, ask: do I know, suspect, or have reasonable grounds to suspect that the information was communicated with the intention of furthering a criminal purpose? If yes, the crime/fraud exception applies and the privilege exemption falls away. Report to your MLRO.

Step 3: Can you separate privileged from non-privileged information?

In many real situations, your suspicion will be based on a combination of privileged and non-privileged information. You can report the non-privileged elements (your own observations, CDD findings, third-party information) without disclosing the content of privileged communications. Discuss with your MLRO how to draft the SAR in a way that fulfils the reporting obligation while respecting privilege.

When you are genuinely uncertain

If, after working through these steps, you remain uncertain whether privilege applies, the SRA and the Law Society both advise that you should:

• Discuss the situation with your MLRO without disclosing the substance of the privileged communication if you believe it is genuinely privileged
• Seek guidance from the SRA's ethics helpline or the Law Society's practice advice service
• Consider whether independent legal advice on the privilege question is warranted
• Document your reasoning and the steps you took to reach your decision, whichever way it goes

Do not allow uncertainty to become a reason for inaction. Liability under section 330 arises on an objective test: you commit the offence by failing to report when you knew, suspected, or had reasonable grounds to know or suspect that another person was engaged in money laundering. If in doubt, err on the side of reporting the non-privileged elements.

Common scenarios

Conveyancing: client explains source of funds verbally

A client tells you during a meeting that the purchase funds come from a cash-intensive business. This verbal explanation, given in the context of seeking legal advice on the conveyancing transaction, is likely privileged. However, when you subsequently check bank statements and see patterns inconsistent with the explanation, your suspicion arises from the CDD evidence, not the privileged communication. You should report based on the CDD findings.

Corporate transaction: unusual structure requested

A client instructs you to create a chain of offshore companies to hold a UK property. The instructions themselves are privileged if given in connection with seeking legal advice. However, if you suspect the structure is designed to conceal the beneficial ownership of proceeds of crime, the crime/fraud exception applies. The privilege does not protect instructions given with the intention of furthering money laundering.

Litigation: opponent's suspicious behaviour

During litigation, you become aware through disclosed documents that the opposing party may be laundering money. Information obtained through the litigation process from the opposing side is not privileged (it is not communication from your client for the purpose of legal advice). You should report to your MLRO.

Record keeping

Whatever decision you reach on whether to report, document your reasoning. Record:

• The nature of the information that gave rise to the concern (without disclosing privileged content in the record if you determined privilege applies)
• Whether you assessed the information as privileged, and why
• Whether you considered the crime/fraud exception, and your conclusion
• What action you took (reported to MLRO, filed SAR, determined privilege applies and did not report)
• Any guidance you sought from the SRA, Law Society, or external advisers

Retain these records for at least 5 years, consistent with MLR 2017 record-keeping requirements. The SRA may request to see evidence of your decision-making during supervisory reviews.