The Financial Action Task Force (“FATF“) released a report yesterday entitled “Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals” (the “Report“) identifying situations of exposure for lawyers to money laundering and suggesting best practices to minimize those risks.
The material parts of the Report are as follows:
1. Reports about law firms
Financial institutions, banks, and other reporting entities (“Reporting Entities“) in most jurisdictions around the world report suspected money laundering activities in cases where they believe a lawyer may be implicated or complicit in a client’s suspected money laundering activities.
In some jurisdictions, Reporting Entities report lawyers in as many as 3% of all suspicious transaction reports (“STR“) filed with government agencies.
2. Mandatory reports by law firms
In some countries, lawyers are required to file STRs on client activities. Countries in which lawyers or other legal professionals most frequently report suspected client money laundering include Switzerland, U.K., Hong Kong, Trinidad & Tobago, Sweden, Netherlands, Liechtenstein, France and Austria.
In Canada, lawyers are exempt from the requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA“) in respect of STRs and do not report client suspicious activities to government agencies.
The types of activities that lawyers report most often to government agencies in STRs include:
- Setting up trusts.
- Real estate sales.
- Trust & corporate services.
3. Predicate offences
When lawyers submit STRs they identify in the STRs, certain applicable predicate offences. A predicate offence is the crime pursuant to which money is laundered. In other words, the underlying crime. The predicate offences lawyers report in STRs most often as those which they suspect their clients have committed are:
- Tax crimes (evasion, etc.).
- Drug trafficking.
- Insider trading.
4. Professional secrecy impacts investigations
According to the Report, law enforcement agencies in many countries cite several challenges in prosecuting cases where law firms are involved because of privilege, referred to as “professional secrecy” in the Report.
One of the additional challenges identified in prosecuting lawyers for involvement in money laundering is the fact that they enjoy a high level of prestige and social ranking in society, partially as a function of their role but also as a result of their higher level of education. This is especially true in Europe where lawyers are titled. According to the Report, the social status of lawyers shields them from prosecution.
Other specific challenges identified, some of which are perceived rather than real, are:
- Absolute prohibition against monitoring and intercepting communications of lawyers (emails, text messages, phone conversations).
- Time-consuming and often fruitless process of seizing documents at law firms because of privilege.
- Lack of access to client files because of privilege.
- Uncertainty over the rights of law enforcement to seize documents because of the uncertainty over the scope of privilege.
- Lack of impartiality of judges because of the close relationships between lawyers, judges and generally members of the legal profession.
- Ability of lawyers to use their position to access resources not available to others (governments, databases, officials).
5. Red flags for lawyers & businesses generally
According to the Report, there are several “red flags” in certain business relationships that could give rise to suspected money laundering. The most relevant are as follows:
- Person is secretive, particularly about sources of funds.
- Person acquires wealth quickly.
- Funds are derived from online sources or businesses.
- Person purports to have business but no Internet website.
- Person held public position and also has number of private companies.
- Person asks repeated questions about client ID and seems to know above ordinary level of knowledge on client ID requirements.
- Transaction involves inordinate amount of private funding inconsistent with socio-economic profile of person or their business.
- Transactions involving the wiring of currency from or to foreign countries, in particular, countries with lax tax laws and corporate secrecy rules;
- Arrangements are made for beneficial ownership.
- Person has engaged more than one lawyer or law firm for transactions.
- Services are being requested with short timelines for completion.
- Person sets up multi-layered complicated corporate structures for the business (unless person is lawyer, or highly skilled business person who has a sophisticated understanding of tax and corporate law).
The Report is available at this link.