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Hold the front page: lawyers might be used for money laundering

Nigel Morris-Co...

It's probably not a great idea for me, an English solicitor (retired) to be publicly harsh about my professional body. But, seriously, is the Law Society of England and Wales contrary or comatose? It really just does not "get" money laundering risks and its latest attempt to update its guidance demonstrates that its attitude is, simply, retarded.

I cannot remember when I first explained that solicitors (that is general practitioners in the legal profession) were at risk from clients who wanted to use them as a vehicle for money laundering. Certainly, there are warnings in my 1996 book "How not to be a money launderer" and the Law Society should not be able to claim ignorance: I once saw a copy in their own library.

I had meetings with the then regulatory arm of the Law Society - they agreed with me that there were obligations on solicitors under the Money Laundering Regulations 1993 - but the "trade union" arm of the Society argued against that interpretation.

It has continued to do so and has obtained a wide range of exemptions for lawyers - as have similar bodies across the EU and some other parts of the world. Every time they have sought such exemptions, I have argued, sometimes directly and sometimes via megaphone diplomacy, that they are wrong: that the best way to protect the profession is to ensure that all firms, big and small, regardless of business activity, are required to put in place measures to detect and deter money laundering.

And one of the areas that I have specifically drawn attention to is litigation. Litigation is tailor made for money laundering schemes: all one person has to do is sue another for a sum of money and watch the case fold with payment of the debt, damages or other form compensation or restitution. Really: it's mind-numbingly simple and obvious.

And that's why it is so utterly ridiculous that litigation lawyers are outside the scope of those required to undertake even the most basic due diligence on their clients.

And so, an announcement today that the Law Society of England and Wales is warning litigation solicitors that they might become targets of money launderers is a matter of wonder for me: an article in the Society's magazine is headlined "Money launderers set sights on new targets, Chancery Lane warns."

"Chancery Lane" is profession code for the Society.

The Society is, apparently, "warning litigation practices that money launderers are targeting matrimonial law and debt recovery."

Yes, Homer Simpson: you said it well. DUH!!!

"According to the Society, a perception that solicitors engaging in litigation may not be sufficiently vigilant on client due diligence has led both money launderers and fraudsters to target law firms."

It's not a perception - it's reality and it's specifically because the exceptions to the EU Directive, the FATF R40 and regulations made in compliance with those provisions have designed-in that risk.

Actually, what the article is really about is that law firms in England and Wales are being subjected to a similar type of fraud or laundering scheme that has been prevalent in the USA for some time. It's similar to the broader scheme where victims are asked to bank cheques for a business and then send the money on. And, rightly, the Society warns that there is risk that the firm has moved (thanks for using my term for this part of the process) proceeds of crime.

But even here, the LawSoc has missed a significant part of the risk: where an opposing party pays using a foreign cheque, it can take several months to clear. But banks allow the cheque to be drawn against on a recourse basis. That means that the account holder has use of the funds but is liable if the cheque subsequently bounces. This is actually the basis of the fraud that is most commonly committed.

The Law Society clearly does not see the stupidity of the situation under which it negotiates for its members an excuse-me from laws requiring them to undertake due diligence measures and to identify and report suspicious transactions and then tells them they are at risk of prosecution and regulatory proceedings if they are in fact victims of a money laundering or fraudulent scheme. In fact, the Law Soc has warned about this kind of fraud: it was belated - 2010 and 2011 - but at least it got around to it.

They really need to man up and tell the profession that it's being stupid by refusing to undertake due diligence measures similar to those undertaken by banks and other financial institutions. Lawyers are easy and obvious targets.

And the Law Society's latest guidance does not begin to go far enough. "Undertaking some due diligence on litigation clients, especially in unusual situations is advisable. This does not necessarily mean obtaining passports, but checking websites and company registration of both parties or previous legal representatives may be advisable if there are warning signs present in the retainer," it says.

Seriously? That's precisely why lawyers are easy and obvious targets. If they don't have due diligence information, how are they supposed to know what to be suspicious of? Osmosis?

Any law firm that relies on the exemption from the various Regulations is putting itself at risk. And to use the Law Society's stance as a fall-back position is a dangerous, arguably irresponsible, position. As I wrote in 1996: " there is a provision in The Regulations that, if you act in accordance with guidance from your professional body, you have prima facie acted in accordance with The Regulations.. It does not provide any exemption from prosecution under the criminal law for money laundering per se."

Indeed, as I warned then, any prosecutor worth his salt would say that the solicitor had deliberately failed to ascertain the risks of money laundering and therefore should be held to be wilfully blind.

How not to be a money launderer has been reprinted and is available in paperback and e-reader formats. See www.countermoneylaundering.com

Nigel Morris-Cotterill is Head, The Anti Money Laundering Network (www.antimoneylaundering.net), ultimate parent of ChiefOfficers.Net