Dirty money

From basic ID checks to enhanced due diligence when working with the ‘politically exposed’, Melanie Mylvaganam reminds barristers of their vulnerabilities to money laundering scams – and how to avoid becoming unwittingly complicit

Money laundering reared its ugly head again in the wake of the ‘Panama Papers’ exposé. 


Terrorist financing activities continue to frequent our news cycle. The possibility of becoming complicit in such schemes should be enough to strike fear into any lawyer.

High risk sector

Legal service providers were declared ‘high risk’ for money laundering and terrorist financing in the recent National Risk Assessment (NRA); the third highest risk in the regulated sector, in fact – outdone only by banks and accountancy service providers. (UK National Risk Assessment of Money Laundering and Terrorist Financing, HM Treasury and Home Office, October 2015). Barristers themselves are low risk in this high-risk sector; the Money Laundering Regulations 2007 (the Regulations), also, only apply to work done in the ‘regulated sector’. This does not, however, negate the need for barristers to keep themselves informed of their obligations. Global proceeds of crime were estimated at 3.6% of GDP in 2013, and the estimated social and economic costs of serious and organised crime in the UK is at least £24bn a year (Understanding organised crime: estimating the scale and the social and economic costs, Home Office, October 2013).

It is an unfortunate irony that lawyers are particularly vulnerable to these criminals, who often target them to assist in their money laundering and terrorist financing schemes; not only for legal services, but for the air of legitimacy and authenticity which their services may lend. The NRA states candidly that ‘the same factors that make the UK an attractive place for legitimate financial activity – its political stability, advanced professional services sector, and widely understood language and legal system – also make it an attractive place through which to launder the proceeds of crime.’ Some criminals also seem to hold the mistaken view that client confidentiality and legal professional privilege will afford them ultimate protection. It is important to understand that the opposite is true – legal professional privilege does not protect communications made in the furtherance of a crime; rather, a barrister instructed in relation to a matter in the regulated sector is legally obligated to report suspicious activity. Should a barrister fall foul of relevant legislation, maximum sentences for such offences range from two years’ imprisonment for a breach of the Regulations to 14 years’ imprisonment for a breach of the substantive offences under the Proceeds of Crime Act 2002 (POCA 2002) or the Terrorism Act 2000.

Implications for your practice

Detailed advice was issued to barristers by the Bar Council in Money Laundering and Terrorist Financing, published earlier this year. The most frequent enquiries received by the Bar Council’s Ethical Enquiries Service on this subject relate to identification checks; particularly from barristers and clerks not having received the requested identification from the lay client before beginning work on the case. Taking a risk-based approach to the customer due diligence (CDD) obligation, in low-risk circumstances this may not present an insurmountable hurdle – but in higher risk circumstances this should sound alarm bells.

For barristers representing clients on charges of money laundering, it may be reassuring to learn that in ‘the ordinary conduct of litigation’ the barrister is not required to make a disclosure or seek consent prior to acting, even if the client is convicted. The barrister can also receive fees from this client. However, at all times the barrister will need to remain alert to ensure that they are not being used in the furtherance of money laundering or terrorist financing.

A risk-based approach

Undertaking customer due diligence

The essence of customer due diligence (CDD) is satisfying yourself that you know who you are really representing. CDD is the process of verifying the identity of your client, as well as any beneficial owners involved, and establishing the purpose and intended nature of your business relationship. Contrary to a prevalent assumption, the CDD obligation applies to both professional and lay clients.

There are two additional types of customer due diligence: ‘simplified’ and ‘enhanced’. If you can be satisfied that the risk is relatively low, it may be that simplified due diligence is all that is required. In other circumstances, for example where your client is a politically exposed person (PEP), the process will be ‘enhanced due diligence’. If you are instructed by a professional client, you may be able to agree with and rely upon them to carry out the CDD. The obligation, however, still rests with you as the ‘relevant person’ under the Regulations.

Where you are unable to comply with your CDD obligations, you must return your instructions. You should also consider whether the failure to complete CDD means you will need to make a suspicious activity report (SAR) to the National Crime Agency.

CDD and direct access

In public access cases, it is not possible to delegate responsibility for CDD. A client’s connection to a PEP, for example, raises the risk level of the case, and introduces the requirement for enhanced due diligence. Compliance with the enhanced due diligence regime will fall directly upon you as counsel and you must ensure that it is complied with before you commence acting. While a solicitor will normally be able to assist in conducting a search of your client’s name against their databases, in public access cases you will need to undertake this search yourself.

In licensed access cases you may be able to rely on CDD carried out by the licensed access client upon the lay client; again, you will need to adopt a risk-based approach in making this determination. In some circumstances you may also need to carry out CDD on intermediaries – as always, on an ongoing and risk-appropriate basis.

Looking out for ‘red flags’

Is your client unusually secretive? Are they unwilling to produce identification, or are they always too far away to meet with you? A secretive client, or a sudden, unexplained change in the case should trigger a barrister’s warning bells.

Overpaid fees, very quick settling of debt, illogical or sparse paperwork may be signs of ‘sham litigation’: fake litigation created to transfer funds from one party to another as a cover for money laundering.

Making a suspicious activity report (SAR)

Barristers are required to report suspicious activity by way of an SAR, should they know, suspect or have reasonable grounds to suspect that a person is involved in money laundering or terrorist financing. This obligation comes hand-in-hand with another – the barrister must not in any way ‘tip off’ the person they are reporting. Both a failure to report, and the action of ‘tipping off’ are offences under POCA 2002.

Further information can be found in the Bar Council’s Money Laundering and Terrorist Financing publication. Please note that neither this article nor this document are ‘guidance’ for the purposes of the BSB Handbook I6.4. They do not comprise – and cannot be relied on as giving – legal advice.

Contributor Melanie Mylvaganam, policy analyst in legal affairs, practice and ethics at the Bar Council

CAN YOU ACT? PRACTICAL EXAMPLES

Q Counsel is instructed by an elderly client on a public access basis in a minor road traffic matter to be heard in the magistrates’ court. The client does not have a photo identification and has only been able to provide counsel with an old-style paper driving licence. The client has applied to have their passport renewed but the new passport has not yet been received. Considering counsel’s obligation to satisfy themselves that they can identify and verify the identity of their client on the basis of documents, data or information obtained from a reliable and independent source, can counsel act in these circumstances?
A Counsel can act. As criminal litigation falls outside the scope of the regulated sector, the Regulations do not apply and there is no CDD requirement. Had the matter fallen inside the regulated sector, counsel would have needed to undertake CDD. In doing so they would have had to obtain documentary proof of identification proportionate to the money-laundering risks involved. It would be rare for there to be circumstances where some form of valid photo identification would not be required.

Q Your instructing solicitors have asked for your advice on a technical aspect of property law which is relevant to a proposed property transaction. The client is an off-shore company and you have been provided with a certified copy of the company’s ‘Certificate of Incumbency’ with the papers. Your clerk has asked the instructing solicitors for more CDD documents from the client, but has been told by the solicitors that they do not yet have any other documents, and in no uncertain terms that it will be very difficult to discover the name of the ultimate owner of the company. What should you do?

A Ideally you will ensure that you obtain a full understanding of who is really behind the company you are acting for, which will mean obtaining certified copies of all relevant documents showing the ownership and control of the client company. If that is not possible, then you must insist on a certificate from the solicitors which complies with Regulation 17 of the Regulations. You will need to be reassured by the solicitors that, before giving you a certificate, they have completed their CDD and have identified all beneficial owners. All of this needs to be done before you give your advice.

 

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Melanie Mylvaganam

Melanie is a policy analyst: legal, affairs, practice and ethics for the Bar Council, leading on anti-money laundering/counter-terrorist financing policy, direct access policy and IT policy. Melanie also manages the professional practice and ethics document library for barristers, and is an ethical adviser on the Ethical Enquiries Service.