Financial Action Task Force: Is anyone top of the league on suspicious transactions?

The Financial Action Task Force (FATF) has produced a report into the legal professions’ role in money laundering and terrorist financing internationally.

It aims to, “determine the degree to which legal professionals globally are vulnerable for ML/TF risks in light of the specific legal services they provide” and to identify “red flag indicators” useful to the professions, regulator and law enforcement agencies. It is based on over 100 money laundering case studies in areas such as the misuse of client accounts; real property transactions; the creation and management of trusts and companies; managing client affairs and the making of introductions; litigation; and the setting up and managing of charities. The case studies would provide a useful training and teaching resource. Some were based on suspicious transaction reports (and – where made late for example – were not always sufficient to ward off sanction). The case studies ranged from innocent and naïve involvement to complicity. There are some rather toe curling examples. One of the problems to which the report refers is a tendency for failure to involve a wilful blindness to red flag indicators. Where that wilful blindness persists for the same clients or similar kinds of transaction it is seen as corruption.

A key question is how good legal professionals are at spotting the red flags. Only if they are spotted does the ability to abide by the law, and ethical rules, come into play. “Discerning legitimate client wishes from transactions and structures intended to conceal or promote criminal activity or thwart law enforcement,” is the acid test.

The report suggests significant variability internationally on the extent to which self regulating and professional bodies educate their members about risks. It relies on the case studies as evidence that not all legal professionals undertake sufficient (sometimes any) due diligence. Legal professional privilege and laws of “professional secrecy” inhibit the identification and investigation of money laundering and terrorist financing:

“there is significant diversity between countries in the scope of legal professional privilege or professional secrecy. Practically, this diversity and differing interpretations by legal professionals and law enforcement has at times provided a disincentive for law enforcement to take action against legal professionals suspected of being complicit in or wilfully blind to ML/TF activity.”

Whilst a balance needs to be struck between protecting the client’s rights, and protecting their ability to take advice confidentially, the report suggests these inconsistencies drive problems. Also the extent to which exceptions to privilege are misunderstood may also create problems.

Conversely, and understandably, there is very little information about how serious a problem money laundering and terrorist financing is for legal professionals. Whilst up to 30% of confiscated criminal assets are real estate, that tells us very little about how many property transactions passing through lawyers hands are tainted. Suspicious transaction reports involving legal professionals, whether they were complicitly or unknowingly involved in their client’s criminality…. [mentioned] potential involvement of legal professionals in money laundering ..[in] between .035% and 3% of all STRs reported.” The question then is, of course, to what extent suspicious transaction reports reflect broader patterns in money laundering. They may well not.

A questionnaire sent to FATF members, self-reulatory and professional bodies was used to collect data on suspicious transaction reports. The report acknowledges the difficulty in comparing across different countries where lawyers (and other professionals) perform different roles which may be more or less likely to expose them to money laundering. The comparison of most interest is between lawyers and other designated non-financial businesses and professions (DNFBPs). According to this data UK lawyers accounted for about 2% of suspicious transaction reports in 2010; compared with 6% from other DNFBs. Many of the countries supplying data had similar or lower levels of reporting as can be seen from this summary table I prepared from data for 2010.

 

Legal Professionals

DNFBPs

Total Suspicious Transaction Reports

United Kingdom

2%

6%

228834

Netherlands 2

0%

 

198877

Italy

0%

1%

37047

Finland

0%

19%

21454

Hong Kong/China

1%

1%

19690

France

5%

7%

19208

Belgium

1%

6%

18673

Ireland

0%

1%

13416

Sweden

0%

3%

12218

Norway

0%

1%

6660

Spain

13%

19%

2991

Denmark

0%

1%

2315

Austria

1%

 

2211

Portugal

0%

 

1459

Switzerland

1%

28%

1146

Curacao

0%

9%

757

St Vincent and Grenadines

0%

0%

502

Liechtenstein 1

2%

35%

324

Jordan

0%

0%

208

Trinidad and Tobago

0%

23%

111

Montenegro

0%

 

68

 

The generally low level of reporting by lawyers and the variation gives pause for thought.. Though it does not suggest the UK lawyers are lagging behind, the extent to which high levels of financial business; the property market and the attraction of London in particular mean that one would expect higher levels of suspicious activity and reporting than elsewhere.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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