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Skip Navigation LinksHome :: Back Issues :: Lawyers held to account on money laundering

July 2000

Lawyers held to account on money laundering


Powerful international task forces charged by G7 governments with fighting money laundering have long pressured banks into taking responsibility for the activities of their customers. Now lawyers may come under the same kind of scrutiny By Nigel Page




Two blacklists published within a week of each other at the end of June have raised the profile of international efforts to combat money laundering and tax evasion. The G7-sponsored Financial Action Task Force (FATF) broke the public silence it has maintained for the 10 years since it was established, by posting a list of 15 jurisdictions it considered to be "non-cooperative" in the international efforts to reduce the scope for money laundering. The list, which included 10 Caribbean islands, also named Israel, Russia, the Philippines and Liechtenstein.
Some of those on the FATF list had their reputations further tarnished when the OECD published a list of countries it considers "harmful" tax havens on June 26. A long lit of 35 offshore financial centers were named as tax havens that, the OECD claims, "harm trade and investment." Among others these include Monaco, Jersey, Guernsey, Gibraltar, Bahrain and the Bahamas.
These moves come at a time when the G7 nations are stepping up pressure on jurisdictions seen to be helpful to anyone recycling the proceeds of crime, not just drug trafficking but also fiscal crime, otherwise know as tax evasion.
They are pushing hard to end the culture of bank secrecy that makes so many of these centers attractive to the money launderer and the tax evader. The US Treasury Secretary, Larry Summers, is said by some observers to "have the bit between his teeth on offshore jurisdictions" and following the FATF report, the US government is considering asking US banks to reassess their ties with some of the jurisdictions on the Task Force's list.
Until recently the emphasis of anti-money laundering initiatives has been placed firmly on banks and financial intermediaries to ensure that their systems are sufficiently transparent and robust to detect and prevent the work of money launderers. However, the resolve to address money laundering, and the increasingly strong connection made between tax evasion and the proceeds of crime, has focused attention on another link in the money launderer's food chain: the lawyer.
John Mica, Chairman of the US House of Representatives sub-committee on criminal justice, has called for a study on the "the appropriate role of gatekeepers in the international financial system, such as lawyers". Howard Davies, Chairman of the UK Financial Services Authority (FSA), said in a speech delivered on June 12 that "it is significant that the second [EU] directive extends the scope of money laundering regulations to bring in non-financial businesses, particularly firms of lawyers and accountants."
The 'criminal economy' is estimated to constitute between 5% and 8% of world GDP.
Even the lowest end of that estimate gives a figure in excess of US$600 billion. The complex chain of events that leads to the proceeds of crime emerging, freshly laundered, into the legitimate economy requires specialist and knowledgeable handling. No sophisticated money laundering operation can take place without lawyers and accountants.
The actions of the OECD and the FATF may point to the existence of lawyers in the more exotic locations who are prepared to remain willfully ignorant of their clients' purposes and the origins of their funds. But it is a nice irony that the top-division money launderers are keen to keep their clients out of the offshore world and firmly in the mainstream financial centers. The problem for lawyers in global financial centers is that, through inadequate safeguards and checks, they may become the unwitting perpetrators of money laundering.
But this, sadly for them, will be of little help when the audit trail leads directly to their door. One ex-Treasury employee says: "There is a perception that, to date, lawyers have got off lightly. Their time is coming and they will increasingly find themselves subject to levels of scrutiny that other financial intermediaries have seen. The scope of the legal work and type of transactions that should raise suspicions will also be broadened."
Lawyers are proving to be one of the biggest sticking points in the debate on the European Commission's draft second directive on money laundering. Some of the member states, notably Germany and France, have argued vociferously against the inclusion of lawyers. What is at stake, they argue, is the confidential nature of the relationship between lawyer and client.
The measures contained in the report are, according to one insider, "perceived as the thin-end of the wedge in terms of undermining client confidentiality. Many are deeply resistant to the levels of compliance required." A report of the progress of the second directive says that though a "majority of delegations have been able to agree as a general principle that the legal professions could be made subject to the money laundering provisions when they carry out some kind of financial intermediation on financial transactions", it also carries the qualification that "a number of delegations felt unable to make any distinction between the different services which members of the profession provided for their clients and pointed out that in their countries the profession's obligation of discretion and client confidentiality was absolute."
But there is an inevitability about this process. In time, lawyers are likely to become subject to the same degree of regulation and compliance as their colleagues in banking and financial services. The sacrifice of a degree of confidentiality has become an accepted aspect of the banks' need to maintain the highest degree of public probity. Lawyers are also likely to have to accept they will need to take a slightly more skeptical view of some of their clients. Andrew Clark, a partner with PricewaterhouseCoopers who specializes in anti money laundering, says that though most large firms have systems in place, "It's fair to say that all lawyers have to comply, but don't always have the right level of resources.
People are not necessarily as aware as they should be of the need to have these controls in place."
Clark says that the nature of money laundering requires lawyers to take an unfamiliar attitude towards their clients: "Money laundering is based on deception, but the controls that need to be put in place are different than perhaps they would be in the case of, for example, fraud. The imperative is to know your client. For instance, clients who make an approach for one type of work and then start asking for another. Sharp lawyers should start to feel uncomfortable with that change and it may well arouse their suspicions."
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