When client confidentiality constitutes a crime

Lawyers could find themselves facing prosecution if they do not report suspicions of fraud among their clients. Keith Nuthall reports

IF any professional legal malpractice could be labelled taboo, it would surely be breach of confidentiality, with all its consequences of undermining the basis of the solicitor-client relationship. But with the growth in sophisticated frauds and money laundering, particularly involving organised international crime, lawyers have been forced to confront an unpleasant moral question over whether they should keep all the secrets they learn in the consulting room.

British and European governments have decided there should be limits here – that no legal advice given to further a crime can be considered confidential – and have legislated to say so. Under the 1993 UK Criminal Justice Act and the 1993 Money Laundering Regulations, solicitors have a duty to report concerns that a client is laundering the proceed, of ill-gotten gains, if they suspect they are being asked advice on how to carry this out. If they fail to do so, they can be accused of being involved in money laundering and – in the case of funds for terrorism or drugs – there is a crime of failing to report.

The moves were inspired by the EU Money Laundering Directive of 1991, which said credit and financial institutions should require the identity of new clients and anyone needing help to facilitate a transaction involving more than ECU 15,000.

The British government's interpretation of this imposed these duties on solicitors engaged in investment business, as well as banks, who have a duty to nominate a person responsible for receiving reports about suspicious transactions and to train their lawyers in how to spot possible money laundering. Five years on, the system is or is not working, depending on who is doing the talking.

Detectives at the National Criminal Intelligence Service (NCIS) say there is a problem. The number of reports about suspicious transactions from solicitors fell in 1997, to 236 cases, from 300 in 1996. The NCIS says this has little to do with an outbreak of honesty in British financial circles, but that lawyers are acting like the three monkeys – seeing, hearing and speaking no evil.

"There is a disappointing failure on the part of… solicitors to meet their legal and moral obligations to report suspicious transactions to the authorities," said a tetchy NCIS statement last month.

On the other hand, many lawyers say their rigorous upholding of the law has scared off would-be money launderers from using their services, because they know they would end up being reported.

Law Society property and commercial services committee chairman Kenneth Byass says: "Because we are tight, the incidences of reports are falling. Every solicitor has heard of the rules, which is amazing in itself."

But the thinking of governments is rather more in line with those of their policemen. Headline-making tales of international terrorism and drug smuggling have made them all too keen to band together to tighten rules on money laundering which, given the globalisation of the world economy, is increasingly easy to carry out.

In Europe, this is likely to mean a tightening of the screws on lawyers as regards rules on reporting suspicious transactions and on demanding proof of identity for clients. A report from the European Commission this summer promised action by early 1999 on updating the money laundering directive.

Financial services commissioner Mario Monti said: "To guard against the single market being exploited by organised crime, we will be coming forward with proposals to extend and improve the current rules. These stronger safeguards will be all the more necessary with the single currency, which will serve to further increase the process of integration within the single market."

What the result of this train of thought will be is now a matter of speculation within the UK legal community. In particular, the commission has said it wants to extend the number of professions currently coming under the ambit of the directive to gaming, auditors, estate agents and lawyers, which could force the UK Government to widen its regulations on identification to include solicitors other than those involved in investment business.

The most popular predictions are that the rules will be extended to those involved in property, conveyancing and company law, in particular those solicitors assisting the purchase and creation of new companies. Many firms already demand identification of new clients because of good business practice, but there is no doubt that such a move would mean more administration.

Diane Burleigh, head of court business at the Law Society, says: "We're very aware that any move to extend the regulations entails an administrative burden of some nature. But we're also aware of the need to make sure that solicitors are protected against being used in money laundering."

On the crime of failing to reporting suspicions of money laundering related to drugs and terrorism, there could be a shift away from the current need to prove that a certain solicitor wilfully failed to act, to US practice where prosecutions can be based on proving that a lawyer should have acted, given the knowledge available to him or her.

Monty Raphael of Peters & Peters says: "We're likely to go down the road of instituting a rule of lawful blindness, with an objective test replacing the current subjective test.

"Instead of considering what a lawyer may or may not have had in his or her mind at the time they were confronted with a suspicious transaction, the test will ask what a reasonable person would have done given the same set of circumstances.

"Accordingly, if the lawyer decides to put the glass to his blind eye and simply not exercise any proper curiosity, it may constitute wilful blindness and be enough for prosecution."

But Raphael, a leading fraud lawyer, saw an upside. He says: "The honest client should not object to these new procedures, with the additional enquiries they will produce. The dishonest client will be "offended' and may ultimately sack the lawyer. That's all to the good: then there will no longer be a respectable professional home for these people."