In its “Risk Outlook, Autumn Update” (“Update”) released last week, the Solicitor Regulation Authority (“SRA”), a regulator of solicitors and law firms in England and Wales, found that although the legal sector remains at “high risk of exploitation for money laundering,” reports made by legal practitioners to law enforcement of suspicious, money laundering-related activities dropped by nearly 10% last year. The Update then explores the AML risks associated with legal services.
As we will discuss below, many of the issues addressed by the SRA Update resonate with similar Anti-Money Laundering (“AML”) issues which have been brewing recently in the United States — such as the issues of beneficial ownership, the potential use of real estate in money laundering, and lawyers as “gate keepers.” Of course, however, the very notion of legal practitioners reporting their clients to law enforcement for suspicious activity — a practice which represents a given to the SRA Update in light of U.K. law reporting requirements — remains deeply antithetical to basic notions of client confidentiality and loyalty held by the U.S. legal profession and courts. We will discuss here this unique convergence of (i) very similar AML issues and concerns confronting the U.K. and the U.S., and (ii) drastically different approaches — at least to date — as to the appropriate duty of lawyers to report the conduct of their own clients to the government.
Regarding the level of money laundering-related risk faced by the legal industry, the SRA’s Update reviewed a recent publication by HM Treasury, the United Kingdom’s economic and finance ministry, entitled “National Risk Assessment of Money Laundering and Terrorist Financing 2017.” The Assessment concluded that professional services “are a crucial gateway for criminals looking to disguise the origin of their funds.” With respect to legal services specifically, the Assessment found these services “remain attractive to criminals due to the credibility and respectability they can convey.” It also noted that “some proportion” of legal service providers was “complicit” in the money laundering cases examined, but that a “majority of these cases” involved practitioners “who are either willfully blind or negligent.” It further noted that, in multiple investigations, the money laundering clients purposefully “compartmentalized work between or within firms to avoid scrutiny.” According to the Assessment, the legal services “at highest risk of exploitation” are:
- Trust or company formation,
- Conveyancing (the involvement of legal practitioners in the purchasing of property), and
- Client account services
Trust or company formation was assessed to be “the legal service at greatest risk of exploitation” because these services can be used to hide beneficial ownership. This point is entirely consistent with the recent scrutiny by both the U.S. and the European Parliament regarding the issue of identifying true beneficial ownership, about which we repeatedly have blogged. However, conveyancing represented the source of 50% of the reports by legal practitioners’ regarding money laundering to law enforcement. Finally, the “client account services” issue—often linked to the purchase of real estate—is one centered on criminals’ use of client accounts to “transfer funds to third parties, effectively breaking the audit trail to launder funds.” Despite the prevalence and high-risk nature of these activities in the legal industry, however, the Update pointed to statistics showing that the number of total reports from the legal sector relating to money laundering fell by almost 10 percent, accounting for less than 0.8% of all reports.
In many ways, SRA Update’s discussion of money laundering issues for legal practitioners in England and Wales mirrors the complex issues facing the legal profession in the United States. As we previously have blogged, both the Financial Action Task Force (“FATF”) and the European Parliament have called for U.S. lawyers to meet higher standards in performing due diligence to detect clients’ potential money laundering, and found U.S. lawyers to be “non-compliant” with entity transparency standards. Further, the U.S. Congress has tried to enact legislation over the years to address the issue of beneficial ownership and the role of lawyer (see our discussion of the Corporate Transparency Act here). More recently, and as we have blogged, the ABA’s Task Force on the Gatekeeper and the Profession has prepared and discussed a new ABA Model Rule of Professional Conduct that would impose basic “client due diligence” requirement on lawyers. Conversely, the ABA Task Force on Gatekeeper Regulation and the Profession has indicated that it opposes legislation such as the Corporate Transparency Act, citing among other reasons, a potential undermining of the privileged and confidential communications attorneys and their clients maintain. Interestingly, HM Treasury’s Assessment, discussed above, takes aim at this privilege, arguing that “lawyers falsely claiming legal professional privilege … pos[es] a risk to the law enforcement response to money laundering … [and has] frustrate[ed] investigations.”
U.S. real estate transactions also may pose money laundering risks, as reflected by the continuing efforts by the Financial Crimes Enforcement Network (“FinCEN”) to focus on Geographic Targeting Orders relating to certain high-end real state transactions, and FATF’s critique that the U.S. regulatory strategy of addressing money laundering risk in the real estate industry through the financial sector “has been of only limited value.” Thus, it is not hard to envision the role of attorneys in U.S. real estate transactions continuing to undergo a close review by both regulators and legislators. Whether more general U.K. notions of legal duties by attorneys to report on the potential suspicious activities of their own clients ever will gain acceptability in the United States is considerably less clear.
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