Dirty business

A year after the National Criminal Intelligence Service criticised law firms for their lack of awareness over money laundering, David Wigan reports on what the profession is doing about its poor record for detecting dirty money

When it comes to money laundering the problem is that few lawyers are 100 per cent sure what it is. Even the term “money laundering” is a touch intangible. You understand it in theory, but are not convinced you would know if it happened to you.

Most partners at London's top law firms know that they have a duty to report suspicious characters to the authorities. Few do. The National Criminal Intelligence Service (NCIS), the Government's secretive criminal intelligence arm, has called on the profession to take a harder line against the money laundering industry – thought to be worth an annual $500bn (£316bn) worldwide. It has also criticised UK lawyers for not believing that there really is a problem.

A spokesman for the NCIS Strategic and Specialist Intelligence Branch led the attack. A year ago he said: “There is a disappointing failure on the part of solicitors to meet their legal and moral obligations to report suspicious transactions to the authorities.” But has anything changed since then?

Andrew Henshaw, partner in charge of monitoring money laundering at Linklaters, said: “We keep our systems under constant review and liaise with other City firms to keep abreast of best practice.”

Louise Delahunty, chair of the Law Society's Serious Fraud and Money Laundering Task Force, says that she is surprised by the magic circle's attitude. “We are very concerned that solicitors should know their obligations and should receive help and support.

“The Law Society is worried because those professions dealing with money are being targeted by organised crime. People should be taking things seriously.”

The Law Society is currently reviewing its guidance to law firms and holding seminars on how to approach the problem.

“Knowing your client is the key,” Delahunty says. “There should be no turning a blind eye.”

But that is the trouble with money laundering – it is designed to evade the keenest eye. The whole point of the exercise is obfuscation. The famous early launderer Al Capone apocryphally coined the term “money laundering” after he bought launderettes with the proceeds of bootlegging activities. He chose launderettes because they were cash businesses, perfect for intermingling ill-gotten gains with legitimate income.

Money laundering as a crime attracted interest in the 1980s, in the context of drug trafficking. Drug money was legitimised through complex international transfers, with funds sometimes travelling around the world in order to cover paths. Computers were proving invaluable tools of the laundering trade.

By 1993, a United Nations report on money laundering recognised that the problem was “characterised by international crime, its global nature and the use of technology and professional assistance”. For the first time lawyers and other professionals were officially acknowledged as being caught in the criminal web.

Article 1 of the draft European Communities Directive of March 1990 defines money laundering as: “The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action.”

The Financial Action Task Force (FATF), a Paris-based organisation formed in 1989 to combat money laundering, wrote in its last annual report: “Professional service providers [are increasingly] associated with more complex laundering operations. These professionals set up and often run legal entities that lend the high degree of sophistication to… schemes.”

Only 1.9 per cent of disclosures to the NCIS are made by lawyers.

If London law firms think that they are not affected – and there has been a tendency for lawyers to cutely argue that it is not they but accountants that are responsible – they are kidding themselves.

In the last decade, governments have introduced a swathe of national and international legislation aimed at combating money laundering. In the UK the most important are the Criminal Justice Act 1993 and the Money Laundering Regulations 1993.

There are five basic offences. Firstly, assisting another to retain the benefit of a crime; secondly, acquisition, possession and use of criminal proceeds; thirdly, concealing or transferring to avoid prosecution; fourthly, failure to disclose knowledge or suspicion of money laundering; and finally tipping off criminals that an authority is suspicious. The legislation provides that making a disclosure will not be treated as a breach of any duty of confidentiality to a client.

Law firms which give investment advice must have a properly trained money laundering officer. The problem is that all too often the training given to the money laundering officer does not extend throughout the firm.

Monty Raphael, senior partner at London firm Peters & Peters and an expert on white collar crime, says: “The concern of the professional and for the profession is that although litigation lawyers are likely to be careful, transactional lawyers need to be a little more jaundiced.”

The Law Society publishes an information pack containing relevant legislation and guidance for firms. The obligation most relevant to lawyers is that of disclosure – the duty to tell the NCIS or FATF of knowledge or suspicion of money laundering activities.

Under the regulations, solicitors should focus their suspicions on specified choke points in the financial system, at which the NCIS and FATF believe that the launderer is most vulnerable. The three main choke points are the entry of cash into the system, transfers to and from the system, and cross-border flows of cash.

PricewaterhouseCoopers' dispute analysis and investigations practice partner Andrew Clark says that law firms must encourage knowledge of the issue at all levels. “It is a simple question of awareness. This is all about issues, not checklists.”

But it is not the job of lawyers to act as a police force. “The difficulty often lies if there is a chain of institutions.The further removed you are the more you tend to rely on the institution that has remitted to you in the first place,” says Clark.

Ian Terry, managing partner at Freshfields, says: “It is difficult to spot problems, but what you can do is look for transactions that don't make commercial sense.”

The entry of cash into the system, known as the “placement” stage, is where the launderer is most vulnerable to detection. Because of the large amounts of cash involved it is difficult to place it in a bank or client account.

The European Union recently proposed tightening its anti-laundering directive, requiring all lawyers to demand identification of who put money into their client's accounts. The new legislation should be in place by 2001.

Most firms have made efforts to put in place due diligence measures and there is evidence that the moves have been a success.

Customs and Excise has reported that money launderers now prefer to smuggle their cash out of the country rather than place it on deposit with their financial advisers. However, “dirty” money still comes into client accounts through bank transfers, and firms have a duty to be vigilant.

Transfers between the UK financial system and bank accounts held outside the UK, the so-called “layering” stage of laundering, are more difficult for law firms to monitor. Numerous so-called international business companies (IBCs) use UK law firms to set up offshore accounts and trusts. In such transactions money may be transferred to or from trust companies in such places as the Isle of Man or the Cayman Islands.

IBC have been heavily criticised by the Organisation for Economic Cooperation and Development (OECD), which is waging a war on what it calls “harmful tax competition” by the world's offshore industry. The OECD is demanding more disclosure of names of directors and unregistered shareholders of off-shore companies, and recently threatened the Bahamas with sanctions if it does not regulate for greater transparency.

It is difficult for London lawyers in such situations to know when a transfer seems suspicious. Is it suspicious, for example, for a politically connected Columbian businessman to transfer large amounts of money from the UK into a blind trust on the Isle of Man?

Thousands of companies hold funds in the UK to take advantage of the stable currency and secure banking. On the face of it, Columbian money going from the UK to an offshore account is not suspicious, but it begs the question of when suspicions might legitimately be aroused. Is it of interest to a solicitor how the money got into the UK in the first place? To a reasonable extent, it is.

The last stage of laundering is the “integration” stage. This may be structured as false loan repayments from offshore accounts, forged invoices, complex webs of transfers, purchases of property or other non-cash investments.

The monitoring of these types of transactions is extremely difficult for lawyers. The NCIS recommends that firms keep comprehensive records of transactions both inside and outside their own jurisdiction, providing a useful audit trail on companies and people involved in laundering schemes if they are later discovered.

In the meantime, vigilance is recommended. Raphael says: “There is a case for more mandatory subsidised awareness training. Firms must do their best and be seen to do their best.”