Bridging finance is usually short term and secured against property, with repayment expected from a sale or refinance. A lender may fund its advances through a bank facility or institutional warehouse line. But a legitimate source for the advance does not answer a separate question at redemption: where did the borrower get the money to repay?
If there is a suspicion that repayment is made using the proceeds of crime, the lender may face an account freeze or civil recovery action even though its original advance was lawful and it had no part in the borrower’s conduct. The issue is what the lender received, what it knew or should have investigated, and whether it can prove it took the payment in good faith.
How POCA can reach a repayment
Part 5 of the Proceeds of Crime Act 2002 (POCA) allows civil recovery of property that is, or represents, property obtained through unlawful conduct. A recovery claim is civil; it does not depend on a criminal conviction, and the person holding the property need not be the person who committed the offence. So if a borrower repays a bridge loan from criminal proceeds, those funds may be treated as recoverable property while they remain in the lender’s account or can be traced.
Where a lender is a “relevant person” under the Money Laundering Regulations 2017, regulation 28(11) requires ongoing transaction scrutiny, including the source of funds where necessary. Whether a particular lender falls within the regulations depends on its activities and structure. A failure to check does not itself prove criminality or make a repayment recoverable, but it may make it harder to show the lender acted in good faith and without notice, and could raise separate AML compliance issues.
Section 308 POCA provides a third-party protection: property cannot be followed into the hands of a recipient who obtained it in good faith, for value and without notice that it was recoverable property. A lender receiving repayment of a genuine debt may be able to rely on this protection, but all three elements matter. A loan agreement and a payment labelled “redemption” will not, by themselves, establish good faith or absence of notice.
An account freezing order (AFO) can be sought where an enforcement officer has reasonable grounds to suspect that at least £1,000 in an account held with a relevant financial institution is recoverable property or intended for use in unlawful conduct. If a repayment lands in a lender’s business account, the account may be frozen while the authorities investigate. The lender need not be accused of a crime for the freeze to disrupt its ability to meet liabilities, fund new loans or pay staff.
A civil recovery investigation can also reach beyond the borrower. POCA Part 8 provides investigative powers, including orders for documents and account information. A lender may have to produce loan files, bank records, redemption calculations and communications. If the authorities consider that the lender holds recoverable property, a property freezing order may prevent it from dealing with specified assets while a civil recovery claim proceeds.
Practical safeguards for lenders
Plan for repayment at the outset. Record the borrower’s stated exit route, expected repayment date and likely payer. If the plan is a sale, identify the property and expected sale proceeds; if it is refinancing, record the proposed lender and anticipated funds. This gives the lender a baseline against which to assess the actual payment.
Control the payment route. Require repayment from an account in the borrower’s name or, where a transaction requires it, through an identified conveyancer’s client account. Ask for advance notice of a different payer, a last-minute change of exit strategy, or payment from an associate, connected company or unexplained third party. Do not treat a solicitor’s client account or a UK bank account as proof of lawful provenance.
Verify the source, not just the route. A bank statement can show where money was held and how it moved; it may not explain how it was generated. Match the incoming amount, date and remitter to the stated exit. For a sale, obtain the completion statement and trace the net proceeds. For refinancing, check the new loan and redemption statements. For business funds, consider relevant accounts and the transactions that generated the money. For third-party funding, establish the relationship, rationale and source of that person’s funds. The depth of checking should be risk based, and the explanation should make sense against the evidence. HMRC guidance cautions that knowing funds came from a UK bank account is not enough.
Escalate discrepancies and keep a clear record. Set triggers for payments from unexpected accounts, unexplained cash deposits, unusual company structures, cryptoasset conversions, rapid movement through multiple accounts or a repayment inconsistent with the borrower’s means. Staff should know when to pause routine processing and refer concerns to the MLRO or legal adviser. Where suspicion arises, consider reporting and consent obligations under POCA before transferring or returning funds; avoid tipping off the customer.
Preserve the evidence. Keep the original exit information, checks, documents, decisions and reasons for accepting the payment. A contemporaneous file can help demonstrate that the lender compared the repayment with what it reasonably expected and acted on warning signs.
These measures cannot guarantee that an account will never be frozen, and an indemnity from the borrower cannot bind an enforcement authority. They can, however, reduce exposure and strengthen a lender’s position when challenging an AFO, responding to a civil recovery investigation or relying on section 308.
If an AFO or POCA investigation affects your lending business, early specialist advice can help protect legitimate recoveries, seek appropriate exclusions or variation, and present the evidence supporting the lender’s position.
How To Get In Contact
To find out more or if you require assistance with these matters, speak with our Business Crime and Civil Recovery Team on +44 (0)204 600 9907 or email info@culbertellis.com.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
