Anti-Money Laundering Compliance and the Legal Profession

Sarah Kebbell

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429670909
• Edition: 1
• Topic: Business
• Subtopic: Business Law
• Index: Business

Money laundering is a global issue and there is evidence that the services provided by the legal profession may be misused to launder the proceeds of crime. This book explores the experiences of professionals within Top 50 law firms when seeking to comply with the UK's anti-money laundering (AML) regime.

The book draws upon empirical evidence from 40 in-depth interviews with solicitors and compliance personnel from 20 Top 50 law firms. Access to this section of the legal profession is challenging in the context of academic research, and the research provides an account, seldom heard in academic literature, directly from practitioners. The book uses these research findings to explore and discuss the AML compliance issues faced by this section of the profession. It highlights the challenges presented by the legislative architecture of the Proceeds of Crime Act 2002, and considers compliance issues relating to customer due diligence, AML training, the client account and the suspicious activity reporting regime. It also considers participants' perceptions of the regime, their role within it, and their own assessment of money laundering risk. It concludes by using this evidence to recommend amendments to current AML policy and legislation.

This book will be of interest to students and researchers studying Financial Crime Law, Business and Company Law, and White Collar Crime, as well as policy makers in the areas of money laundering, compliance, and corruption.

1 Anti-money laundering and the UK legal profession

DOI: 10.4324/9780429019906-1

1.1 Introduction

It has become apparent in recent decades that the services offered by the legal profession may be misused to launder money.¹ Whilst no comprehensive data exists demonstrating with any accuracy the extent to which money laundering has pervaded the UK legal profession, law firms must nevertheless comply with an extensive array of anti-money laundering (AML) measures.² It is the issues which such compliance gives rise to which are the subject matter of this book.

1 The material in this book is up to date as at June 2019 with the exception of the UK’s Economic Crime Plan 2019–22 which was published in July 2019. ‘Money laundering’ is the term used to describe the mechanism by which criminal proceeds are processed ‘to disguise their illegal origin’, FATF, ‘Money Laundering’ (FATF) <www.fatf-gafi.org/faq/moneylaundering/#d.en.11223> accessed 9 April 2019. See FATF, Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals (2013). See also FATF, Report on Money Laundering Typologies 2003–4 (2004); FATF, Misuse of Corporate Vehicles Including Trust and Company Service Providers (2006); FATF, Money Laundering and Terrorist Financing through the Real Estate Sector (2007); FATF, Professional Money Laundering (2018). 2 This comes at a significant cost to the sector, with some law firms reporting annual compliance costs in excess of £1 million, see The Law Society, The costs and benefits of anti-money laundering compliance for solicitors: Response by the Law Society of England and Wales to the call for evidence in the Review of the Money Laundering Regulations 2007 (2009) 25–27; The Law Society, HM Treasury consultation on the transposition of the Fourth Money Laundering Directive – The Law Society Response (2016) 4.

Determining the scale of money laundering is fraught with difficulty, not least because ‘those undertaking it are actively trying to hide it’.³ While there are challenges inherent in any quantification exercise, and its methodology is disputed, UNODC estimated the amount of money available for laundering globally via the financial system to be 2.7% of global GDP or US$1.6 trillion in 2009.⁴ Domestically, the scale of laundering is uncertain, and while estimates vary even within official publications, the National Crime Agency (NCA) notes the ‘realistic possibility’ that annual money laundering impacting upon the UK could be ‘hundreds of billions’ of pounds.⁵ Lower estimates appear elsewhere, and the Government’s Serious and Organised Crime Strategy 2018 offers a more conservative figure (relatively speaking) of ‘tens of billions of pounds’, as does the UK’s Economic Crime Plan 2019–22.⁶ Such figures must be treated with extreme caution, however, with some commentators such as Levi and others concluding that ‘no credible estimates’ exist, globally or nationally, of total amounts laundered.⁷ Quantification attempts aside, economic crime such as money laundering is considered a ‘significant threat to the security and the prosperity of the UK.’⁸

3 Treasury Committee, Economic Crime – Anti-money laundering supervision and sanctions implementation (HC 2017-19, 2010) para 16. 4 UNODC, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crimes (2011) 7. 5 NCA, Annual Plan 2018–9 (2018) 6. 6 HM Government, Serious and Organised Crime Strategy (Cm 9718, 2018) para 25; HM Government and UK Finance, Economic Crime Plan 2019-22 (2019) 11. 7 Michael Levi, Peter Reuter, and Terence Halliday, ‘Can the AML system be evaluated without better data?’ (2018) 69(2) CL&SC 307. In 2019, the Treasury Committee recommended more analysis to better estimate the scale of economic crime, Treasury Committee, Economic Crime – Anti-money laundering supervision and sanctions implementation (HC 2017-19, 2010) para 16, but see Treasury Committee, Government Response to the Committee’s Twenty-Eighth Report: Economic Crime—Anti-money laundering supervision and sanctions implementation (Cm 2187, 2019) 2. 8 HM Government and UK Finance, Economic Crime Plan 2019–22 (2019) 2.

The international response to the global money laundering issue is spearheaded by the Financial Action Task Force (FATF) which promotes and subsequently monitors (via its mutual evaluation process) the adoption of the ‘FATF Recommendations’.⁹ These are ‘soft’ law measures which are internationally recognised as representing universal AML standards which are then tailored and adopted domestically. Whilst various iterations of the Recommendations from 1990 onwards focused on financial institutions, the inclusion of the legal profession and other ‘designated non-financial businesses and professions’ (DNFBPs) in the FATF Recommendations is a relatively recent measure, commencing in 2003.¹⁰ Such inclusion was on the basis that lawyers were identified as one of a number of ‘gatekeepers’ ie, those who ‘protect the gates to the financial system’, reflecting the fact that lawyers are able to furnish or forestall such access.¹¹

9 FATF was set up in 1989 and is an inter-governmental body comprising 36 members and two regional organisations together with nine FATF-Style Regional Bodies (and a panoply of observers), who between them represent most significant financial centres. See FATF, ‘Who we are’ (FATF) <www.fatf-gafi.org/about/whoweare/> accessed 9 April 2019; FATF, ‘FATF Members and Observers’ (FATF) <www.fatf-gafi.org/about/membersandobservers/> accessed 9 April 2019. For the FATF Recommendations 2012 see FATF, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (2012, updated June 2019) (FATF Recommendations 2012 (updated June 2019)). Various other global AML measures include: United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988; Basel Committee on Banking Supervision, Statement of Principles on the Prevention of Criminal Use of the Banking System for the Purpose of Money-Laundering (1988). 10 FATF, The Forty Recommendations of the Financial Action Task Force on Money Laundering 1990 (1990), with revisions in 1996, 2001, 2003, and 2012; FATF, FATF 40 Recommendations (2003). DNFBPs comprise casinos, real estate agents, dealers in precious metals/precious stones, lawyers, notaries, and other independent legal professionals and accountants, and trust and company service providers. See FATF Recommendations 2012 (updated June 2019) Recommendation 22. 11 FATF, Global Money Laundering & Terrorist Financing Threat Assessment (2010) 44, para 214. For a discussion of the ‘gatekeeper initiative’ see Kevin Shepherd, ‘Guardians at the Gate: The Gatekeeper Initiative and the Risk-Based Approach for Transactional Lawyers’ (2009) 43(4) Real Property, Trust and Estate Law Journal 607; IBA, A Lawyer’s Guide to Detecting and Preventing Money Laundering (2014) 5. See also Katie Benson, ‘Money Laundering, Anti-Money Laundering and the Legal Profession’ in Colin King, Clive Walker, and Jimmy Gurulé (eds), The Palgrave Handbook of Criminal and Terrorism Financing Law (Palgrave MacMillan 2018).

The FATF Recommendations 2012 (updated June 2019) contain a number of preventative measures relating to DNFBPs, including the obligation to conduct customer due diligence (CDD) and to report suspicious transactions to the relevant authorities.¹² Those measures apply to legal professionals conducting certain types of transactions for their clients which are considered higher risk, such as buying and selling real estate or companies, for example.¹³ Bringing the legal profession within the ambit of the Recommendations has been beset by controversy from the outset and repeatedly challenged around the globe, most notably with regard to the reporting of suspicious transactions, seen by some within the profession as a fundamental assault on the lawyer–client relationship.¹⁴

12 FATF Recommendations 2012 (updated June 2019) Recommendations 22 and 23. 13 ibid Recommendation 22(d). IBA, A Lawyer’s Guide to Detecting and Preventing Money Laundering (2014)13. 14 IBA, A Lawyer’s Guide to Detecting and Preventing Money Laundering (2014).

Nevertheless, the FATF Recommendations have been adopted at EU level via a series of directives culminating in the Fourth EU Money Laundering Directive (4MLD) and its amending directive (commonly referred to as the Fifth EU Money Laundering Directive (5MLD)).¹⁵ These international and EU measures (when transposed in the case of 5MLD) converge to form an extensive AML framework at a national level within which the UK legal profession operates, with the objective of such national transposition being an ‘effective and proportionate’ AML regime.¹⁶ Given that the UK’s legal services sector is the largest in Europe, and the second largest globally, the reach of this framework is significant.¹⁷

15 Council Directive 2015/849/EC of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending regulation (EU) no 648/2012 of the European Parliament and of the Council, and repealing directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC [2015] OJ L...