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Such software is prohibited in the US under federal wiretapping laws and the Computer Fraud and Abuse Act. In the UK its use would be an offence under the Regulation of Investigatory Powers Act of 2000, better known as RIPA.
Best to consult a lawyer on this type of issue.
I'd just set up a proxy with a good ban list and monitor the logs, our corporate office uses a hardware setup which updates itself. Make sure you let your users know they are being monitored to avoid any privacy issues.