Are your hands dirty?
2 July 1995
Reputable firms may be breaking the law on money laundering reports Mike Yuille
Has the Law Society got it wrong when it comes to what part of a solicitor's business is caught by the money laundering regulations? If it has, then many solicitors are already committing a criminal offence by not fully complying.
Some lawyers think so. Nabarro Nathanson corporate partner John Heller is one who rejects the view that it is only in relation to 'investment related business' that solicitors must comply with the regulations, and warns that a far wider range of finance-related business and advice to clients is subject to them.
This would mean that firms may be unintentionally breaking the law - punishable by up to two years in prison - by not fully complying with the regulations.
And the fact that a firm was complying in good faith with the Law Society regulations may be taken in mitigation by prosecuting authorities, but will not be a defence, admits the Law Society.
Heller, former managing partner and now Nabarros' money laundering reporting officer, starts his argument with the first principle in the money laundering regulations - that they apply to what they term "relevant financial business" practised by solicitors, bankers, and others.
He says that confusion first arose when guidance from the City's Joint Money Laundering Steering Group in 1993 and the Law Society in 1994 interpreted relevant financial business for solicitors in the money laundering regulations to be limited to investment business, as defined in the Financial Services Act.
This guidance meant that solicitors would only have to create systems for identity checking of new clients if the lawyers are providing strictly investment-related services.
But a close reading of the regulations shows an intention by the legislators to apply to solicitors a much wider interpretation of relevant financial business, says Heller.
The confusion stems from a lack of clarity in the money laundering regulations. This is combined with an unclear picture of solicitors' position under banking law as to whether, through use of client accounts, they are engaged in deposit taking.
This unclear picture of solicitors and deposit-taking is reflected in the schedule to the money laundering regulations, which lists activities constituting relevant financial business.
In that schedule, Regulation 4 (1) (a) includes deposit-taking by persons authorised by the Banking Act - which includes banks but excludes solicitors.
However Regulation 4 (1) (h) refers to yet another list of activities written down elsewhere - in the annex to the Second Banking Co-ordination Directive.
In that annex (points 1-12 and 14) are many activities that are arguably part of the business of solicitors, including at point (1) the "acceptance of deposits and other repayable funds for the public".
So the activities that could be caught include activities carried on by many firms. Apart from deposit-taking, Heller includes work on securities issues, flotations, mergers and acquisitions, advice on capital structure undertakings, as well as safe keeping and safe custody services.
Heller says: "Unless it can be argued that the holding of client money is not part of the business of a solicitor, which I would have thought it hard to maintain, then every solicitor who holds client money is, ipso facto, engaging in relevant financial business and subject to the regulations in respect of that activity, if nothing else." He believes that the vast majority of firms will be required to maintain identification procedures under the money laundering regulations.
"The profession seems very reluctant to face up to and accept the full ramifications of these new regulations."
He warns: "If the authorities feel that a solicitor has actively been using or allowing his client account to be used for money laundering purposes... they will try to throw the book at him."
Heller believes the legislators intended solicitors to be caught on these wider definitions, but the lack of clarity has been further confused by the ambiguities in the law concerning solicitors' deposit-taking role.
The City's view supports Heller. The Joint Money Laundering Steering Group, consisting of institutions and trade bodies, fears the Law Society's limited interpretation of the regulations is the weak link in the chain for City compliance.
Sue Thornhill of the British Bankers Association and steering group secretary, says Heller's views are "a new dimension and very valid point", the impact of which is immediate and potentially severe for any solicitors swept up in a police investigation or prosecution.
"It leaves solicitors vulnerable to being used by criminals who are setting up money laundering mechanisms, and is a reputational risk for law firms".
Diane Burleigh, head of the Law Society courts business team, says some solicitors have approached the society with similar fears.
She says: "Our initial view was that these activities did not affect solicitors for the purposes of the regulations. Having heard these arguments (of Heller's) we have gone back and are actively considering them."
She says: "We are aware of these differing points of view. We are are considering them all and will issue fresh guidance if we think it necessary."
The Law Society took the view that the regulations should only apply to investment-related business because it was the only interpretation of relevant financial business affecting solicitors on the agenda in talks with the Treasury, prior to writing the society's guidance.
Solicitors should not unduly worry about their position if they are following Law Society guidance, even though they may not be applying their new record-keeping obligations to other areas of business, says Burleigh.
They would be better off complying with the society's current limited guidance rather than risk being unable to comply with onerous new guidance extending their obligations to other activities, she says.
However, she says: "I would recommend solicitors to read through the regulations themselves. If they are still unsure, they should talk to us about it."
Finally, the chance to resolve the confusion will come in September, when the Treasury leads a review of the regulations.
The City steering group and Law Society will tell the Treasury of their concerns over the solicitors' position.
"It will result either in a change to the money laundering regulations, or change to our guidance," says Burleigh.
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