Lawyers and Money Laundering

5.1 FATF Recommendations on Lawyers

The extension in many jurisdictions of money laundering principles to include lawyers is resultant in part to the 40+9 recommendations of the Financial Action Task Force (FATF). As stated previously, the FATF is an inter-governmental organisation, designed to develop and promote national and international policies, globally, to combat the threat of money laundering, and since 2001, the threat posed by terrorist financing.

At the time of writing [1], the FATF has one hundred and eight member jurisdictions, all committed to adhering, so far as national jurisprudence will allow, to the 40+9 recommendations.

In 2001, the FATF depicted lawyers as potential “gatekeepers” to money laundering and terrorist financing efforts, due to the varied nature of services they provide to their clients. In the FATF Report on Money Laundering Typologies 2000-2001, the FATF stated that lawyers are vulnerable to complex money laundering schemes due to their ability to easily switch between advising on financial and fiscal matters, establishing trusts and corporate entities and completing property and other financial transactions, such as investments.

Also, lawyers are sometimes seen as the authenticity for other professionals when a client is referred to them, confirming their supposed “legitimacy” by association. This in itself represents a unique problem. If lawyers are not obliged to carry out client due diligence checks or report any suspicions they have that the client maybe involved in money laundering or terrorist financing efforts, they are potentially allowing an unsuspecting third party, such as a financial advisor, to incur accessory liability.

As can be seen from the country specific web pages on the IBA Anti-Money Laundering Forum’s website, many jurisdictions have adopted the FATF’s 40+9 recommendations into their national anti-money laundering legislation, or have created new pieces of legislation specifically as a result of the recommendations and their subsequent membership to the FATF or an applicable sub-organisation. However, implementation in many jurisdictions has not been executed to the extent to which the FATF’s 40+9 recommendations fully indicate: case in point – applicability to lawyers.

The response in Europe to the concerns highlighted by the FATF was to enact a Second Money Laundering Directive, imposing anti-money laundering obligations set out in the First Directive (suspicious transaction reporting, client due diligence checks, record keeping and international co-operation) on legal professionals assisting in the planning or execution of client transactions, including property transactions, the management of client money or other assets and the creation of companies and trusts.

The Second Directive therefore had a significant impact on legal professional privilege for all lawyers operating within the European community. Its result was to place a wide-ranging limit on the protection afforded previously to the lawyer-client relationship. Many Member States took advantage however of the caveat created via Article 6(3) of the Directive and provided that legal professional privilege would only be “broken” where the legal professional was not providing advice to the client with a view to legal proceedings [2].

It was due to the circumstances described above, that the IBA established the Anti-Money Laundering Legislation Implementation Group – the AMLLIG – in 2003.

5.2 Adoption of FATF Recommendations v Legal Professional Privilege

Lawyers are now, perhaps somewhat inadvertently, at the forefront of the battle against money laundering. With many jurisdictions, including the United States of America still unwilling to dilute legal professional privilege, the danger now is that these lawyers will be seen as the involuntary facilitators to the money laundering excerpts of their clients that they are bound to “protect”.

Although the U.S. Treasury has reiterated its desire to address the role of designated non-financial businesses and professionals, including lawyers and accountants, in the prevention of money laundering and terrorist financing. However, the U.S. anti-money laundering legislation does not presently incorporate such matters. The rationale of the American Bar Association for this, is the inadequacy of the FATF to clearly define the role and work of the legal profession within their 40+9 recommendations.

Also, the American legal system regards legal professional privilege as fundamental to the lawyer-client relationship. Therefore, it is disinclined towards modifying its current anti-money laundering legislation to include professionals such as lawyers [3].

Trust and confidence are considered as keystone principles to the legal professional relationship. They would be eroded indefinitely, if lawyers were required to reveal information relating to the client to third parties, based upon mere suspicions. A client must feel free to seek legal assistance and be able to communicate with his legal representative fully and frankly.

It is not surprising therefore that all attempts to date to include lawyers within the scope of anti-money laundering legislation have resulted in lawyers having the option as to whether or not to disclose that their client is involved in suspected money laundering activities [4]:

A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary…to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or using the lawyer’s services… [5]

The concern is amongst many jurisdictions, including the United States of America, is that the disparity created as a result creates an anomaly within the legal profession, with many “cross-border” international law firms finding themselves subject to unfamiliar and uncertain money laundering requirements as a result.

5.3 FATF Guidance – The Risk-Based Approach

As described above, many jurisdictions have adopted the FATF 40+9 recommendations in full, the European community being an apt example of this. It appears therefore that anti-money laundering obligations encompassing lawyers are here to stay. However, the IBA has realised that the structure of any anti-money laundering obligations covering lawyers cannot simply take the form of a simple “tick box” procedural list.

To this end, the aim of the legal community has been to adopt a risk-based approach to any anti-money laundering obligations imposed. By applying this approach, anti-money laundering and counter-terrorist financing measures adopted by jurisdictions would be proportionate to the risks identified within particular areas.

This approach would allow valuable resources, allocated to combat money laundering and terrorist financing, to be distributed in a more cost effective manner. The highest attention and resources would be invested in areas where the threat of money laundering or terrorist financing is at its most prominent.

This approach has recently been taken into account by the FATF, which released a Risk Based Approach Guidance for Legal Professionals on 23 October 2008. The Guidance was developed through an active involvement and dialogue with the IBA’s Anti-Money Laundering Legislation Implementation Group, in consultation with other lawyers, including members of the American Bar Association and The Council of Bars and Law Societies of Europe.

 

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  1. November 2008;
  2. Komarek, J, “Legal professional privilege and the EU’s fight against money laundering”, C.J.Q 13 (2008);
  3. Goldstein, H.W, “Debate Over Lawyers’ Role in Anti-Money Laundering Enforcement”, Business Crimes Bulletin;
  4. Rule 1.6: Confidentiality of Information, American Bar Association Model Rules of Professional Conduct. Also available at [5];
  5. Goldstein, H.W, “Debate Over Lawyers’ Role in Anti-Money Laundering Enforcement”, Business Crimes Bulletin Rule 1.6: Confidentiality of Information is available here (emphasis added).

 

 

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