1 Anti-money laundering and the UK legal profession
1.1 Introduction
It has become apparent in recent decades that the services offered by the legal profession may be misused to launder money.1 Whilst no comprehensive data exists demonstrating with any accuracy the extent to which money laundering has pervaded the UK legal profession, law firms must nevertheless comply with an extensive array of anti-money laundering (AML) measures.2 It is the issues which such compliance gives rise to which are the subject matter of this book.
Determining the scale of money laundering is fraught with difficulty, not least because ‘those undertaking it are actively trying to hide it’.3 While there are challenges inherent in any quantification exercise, and its methodology is disputed, UNODC estimated the amount of money available for laundering globally via the financial system to be 2.7% of global GDP or US$1.6 trillion in 2009.4 Domestically, the scale of laundering is uncertain, and while estimates vary even within official publications, the National Crime Agency (NCA) notes the ‘realistic possibility’ that annual money laundering impacting upon the UK could be ‘hundreds of billions’ of pounds.5 Lower estimates appear elsewhere, and the Government’s Serious and Organised Crime Strategy 2018 offers a more conservative figure (relatively speaking) of ‘tens of billions of pounds’, as does the UK’s Economic Crime Plan 2019–22.6 Such figures must be treated with extreme caution, however, with some commentators such as Levi and others concluding that ‘no credible estimates’ exist, globally or nationally, of total amounts laundered.7 Quantification attempts aside, economic crime such as money laundering is considered a ‘significant threat to the security and the prosperity of the UK.’8
The international response to the global money laundering issue is spearheaded by the Financial Action Task Force (FATF) which promotes and subsequently monitors (via its mutual evaluation process) the adoption of the ‘FATF Recommendations’.9 These are ‘soft’ law measures which are internationally recognised as representing universal AML standards which are then tailored and adopted domestically. Whilst various iterations of the Recommendations from 1990 onwards focused on financial institutions, the inclusion of the legal profession and other ‘designated non-financial businesses and professions’ (DNFBPs) in the FATF Recommendations is a relatively recent measure, commencing in 2003.10 Such inclusion was on the basis that lawyers were identified as one of a number of ‘gatekeepers’ ie, those who ‘protect the gates to the financial system’, reflecting the fact that lawyers are able to furnish or forestall such access.11
The FATF Recommendations 2012 (updated June 2019) contain a number of preventative measures relating to DNFBPs, including the obligation to conduct customer due diligence (CDD) and to report suspicious transactions to the relevant authorities.12 Those measures apply to legal professionals conducting certain types of transactions for their clients which are considered higher risk, such as buying and selling real estate or companies, for example.13 Bringing the legal profession within the ambit of the Recommendations has been beset by controversy from the outset and repeatedly challenged around the globe, most notably with regard to the reporting of suspicious transactions, seen by some within the profession as a fundamental assault on the lawyer–client relationship.14
Nevertheless, the FATF Recommendations have been adopted at EU level via a series of directives culminating in the Fourth EU Money Laundering Directive (4MLD) and its amending directive (commonly referred to as the Fifth EU Money Laundering Directive (5MLD)).15 These international and EU measures (when transposed in the case of 5MLD) converge to form an extensive AML framework at a national level within which the UK legal profession operates, with the objective of such national transposition being an ‘effective and proportionate’ AML regime.16 Given that the UK’s legal services sector is the largest in Europe, and the second largest globally, the reach of this framework is significant.17
Legal professionals are subject to the Proceeds of Crime Act 2002 (POCA 2002), the Criminal Finances Act 2017, and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) which replaced the Money Laundering Regulations 2007 (MLR 2007).18 POCA 2002 criminalises money laundering and imposes reporting obligations upon the legal profession in respect of suspicious transactions, whilst the MLR 2017 set out an array of customer due diligence, training, and record-keeping requirements. Each piece of legislation is complemented by HM Treasury approved sectoral guidance issued by the Legal Sector Affinity Group (LSAG Guidance 2018).19 Professional conduct rules also prohibit legal professionals from engaging in money laundering and impose the requirement to comply with all AML legislation pursuant to the Solicitors Regulation Authority (SRA) Code of Conduct.20
The AML obligations imposed upon the legal profession can be said to exemplify what Garland refers to as a ‘responsibilization strategy’ whereby ‘state agencies activate action by non-state organizations and actors’ thus ‘shaping them to the ends of crime control’.21 Indeed, the yoking of the private sector in partnership with the public sector is explicitly embraced by the government as a holistic means of tackling economic crime.22 Notwithstanding any conceptual objections there may be to responsibilisation, in purely pragmatic terms, and in contrast to the state, Campbell notes that ‘private entities are those with adequate access and data’ in an AML context.23
The sector has been the subject of increasing scrutiny in recent years. In 2014, the SRA took the decision to elevate the money laundering risk to its regulatory objectives, which include protecting the public and supporting the rule of law, from an ‘emerging’ risk to a ‘current priority risk’, ie, defined by the SRA as ‘widespread, current’, and posing ‘a significant risk to the public interest’.24 A series of SRA AML reviews of the sector then ensued.25 Following the creation of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) in 2018 and with the SRA in receipt of an increasing number of AML reports, the focus on AML compliance has intensified with renewed vigour.26
Lawyers have frequently been referred to as ‘gatekeepers’ in terms of their AML role on the basis that they operate at a potential point of entry into the legitimate economy.27 A far less edifying discourse has also emerged in recent years, however, casting lawyers as ‘professional enablers’ in relation to the ‘high-end’ money laundering conducted via professional services firms.28 This narrative was fuelled in part by the Channel 4 documentary ‘From Russia With Cash’, which was aired in July 2015 and hinted at lawyers’ complicity in money laundering, triggering a flurry of media attention in the area.29 Naturally, this characterisation of the legal profession as enablers of money laundering has been vigorously contested by the sector.30
The UK’s first National Risk Assessment (NRA 2015) was published in October 2015 and rated legal service providers at ‘high’ risk of exploitation for money laundering relative to other industries, assigning the sector a higher overall risk rating than either estate agents, money service businesses, or digital currencies.31 In response, the president of the Law Society at the time expressed disappointment at the ‘misleading assessment’ of the sector, which was attributed to intelligence gathering shortcomings.32 Despite greater engagement between the sector and the government in intervening years, this risk rating was reiterated once more in the NRA 2017 on the basis of the ‘attractiveness’ of legal services to criminals and the ‘prevalence’ of those services ‘in high-end money laundering’.33 An important caveat was set out in the NRA 2017, however, noting that a high risk rating in relation to a sector served as a call to vigilance as opposed to a blanket signifier of complicity or negligence in relation to laundering.34
It can be seen from the preceding paragraphs that legal professionals in England and Wales are entwined in an ever shifting AML landscape. A ‘blizzard of action plans, strategies and international initiatives’ which preceded the FATF mutual evaluation of UK AML compliance in 2018 (where the UK achieved the highest aggregate score of any country at the time, raising eyebrows in the process), and the Treasury Committee Economic Crime inquiry of the same year, has ensured that scrutiny of UK AML, including the legal profession, has continued unabated.35 A National Economic Crime Centre was created in October 2018 in order to coordinate the UK response to economic crime by drawing together expertise from the public and private sectors.36 The Economic Crime Strategic Board was set up early in 2019 to ‘set priorities, direct resources and scrutinise performance’ in this space, with the UK’s Economic Crime Plan following in July 2019.37 The Plan is essentially a public-private partnership blueprint in response to economic crime.
It is against this backdrop that the book is situated, complemented by the author’s direct practitioner experience as a senior corporate banking lawyer for several Top 50 UK law firms, which has shaped and informed the research.38 The book explores the experiences of professionals within Top 50 law firms when seeking to comply with the UK’s AML regime. The research question posed is deceptively straightforward: what are the compliance issues encountered by the legal profession in Top 50 UK law firms when implementing the UK AML regime? The answer to that question, which is the subject matter of this book, is both complex and multi-dimensional, culminating in a number of recommendations in relation to UK AML policy and regulation. Whilst AML and counter-terrorism finance (CTF) are often intertwined, the focus of this book is exclusively on AML. The focus is also largely on the prevention aspects of AML such as CDD and reporting suspicions of money laundering, although participants’ perceptions of SRA AML supervision, and enforcement are considered.
The research was conducted using 40 semi-structured, in-depth qualitative interviews with those able to offer multiple perspectives on the AML regime in Top 50 UK law firms. Such firms form part of the ‘regulated sector’ for AML purposes on the basis of the type of legal services provided by them, such as buying and selling property or businesses.39 Participants were drawn from 20 Top 50 UK law firms, evenly split between those who were solicitors at partner level, and those who were money laundering reporting officers (MLROs), deputy MLROs, or those undertaking a senior compliance role within their organisation. In this way, AML compliance issues could be identified by those at the ‘coalface’ of legal practice, as well as those viewing AML from a pure compliance perspective. The sample used was not representative in nature; rather a purposive sampling approach was deployed whereby participants were selected according to their relevance to the research. Those responses, which were rich and multi-layered, were then thematically analysed, which is a means of ‘identifying, analysing and reporting patterns (themes) within data’.40
Whilst there is an extensive and ever increasing body of literature relating to money laundering in a general context, there is little by way of academic empirical inquiry in this area. Much existing research on money laundering and the legal profession is either largely quantitative in nature, and/or focuses on lawyer involvement in laundering.41 Much research on AML compliance relates to financial institutions as opposed to the legal sector.42 The significance and originality of this research therefore derives from a blend of three factors: it expands the field by approaching the issue using a qualitative methodology, from a compliance perspective within the legal sector, and draws upon responses from a section of the legal profession that is extremely hard to access for research purposes. Whilst views on the regime may be represented by bodies such as the Law Society, or the City of London Law Society, this book explores the views of those participants directly, which is seldom the case in academic literature.
This book is structured in the following manner. The remainder of this chapter explores the background to money laundering and examines those money laundering ‘typologies’ affecting the legal profession. Chapter 2 details the legislative framework provided by POCA 2002 and MLR 2017, within which the legal profession operates, amplified where relevant by sector-specific guidance. Although the interviews were conducted prior to the transposition of 4MLD, when the MLR 2007 applied, comparable compliance challenges present themselves post transposition. Any developments brought about by MLR 2017 are discussed, where relevant, in the data chapters themselves. Chapter 2 then outlines SRA AML regulation.
The methodological approach adopted by this research is considered in Chapter 3, which expands upon the brief methodological outline already provided in this introduction. The chapter explores the ontological and epistemological stance of the author, explains the rationale behind the choice of semi-structured qualitative interviews as a research method, and describes the purposive sampling technique deployed, together with the ethical considerations encountered. It describes the data collection and data management process and details the way in which the interview data was thematically analysed. The limitations of the research are then considered: both that the interviews were conducted by an ‘insider’ researcher, with the potential for researcher subjectivity that that position may engender, and that the interviews explore AML compliance through a distinct lens – from within a very specific section of the legal profession alone. Notwithstanding these limitations, the interviews still form a rich, detailed, and multi-faceted portrait of AML compliance issues within Top 50 UK law firms. The study is supported throughout by robust and meticulous research processes.
The research findings are presented and explored in four subsequent data chapters. Consonant with a research approach which utilises thematic analysis, the chapters are ordered thematically and report on the overarching themes within the interview data. Chapter 4 considers the AML compliance issues encountered by the profession in relation to the UK’s AML legislative architecture. Both the exclusion of minor offences and regulatory breaches from the ambit of POCA 2002, and the inclusion of an intent element (currently absent) within the substantive money laundering offences under the Act are explored. The retention of criminal sanctions for breaches of the MLR 2017 is then considered.
The focus of Chapter 5 is on the mechanical aspects of day-to-day practice. It explores, inter alia, the CDD issues encountered by participants relating to the following: (i) beneficial ownership, (ii) simplified due diligence, (iii) politically exposed persons, (iv) source of funds, (v) source of wealth, (vi) reliance, (vii) ongoing monitoring, and (viii) AML training. It then considers the client account.
Chapter 6 explores participants’ experiences of the suspicious activity reporting (SARs) regime, which requires legal professionals to report suspicious transactions, initially internally to their MLRO who then reports externally to the NCA. The chapter outlines the regime, then focuses on the meaning of the concept of ‘suspicion’, which triggers reporting requirements under POCA 2002. It considers the relationship between the MLRO and those reporting to them, and identifies ways in which the MLRO can be better supported in practice: first by the creation of a bespoke reporting form for the profession and second by improved feedback and information sharing between the NCA, law enforcement, and the sector. The difficulties encountered when managing the client relationship whilst seeking consent from the NCA to continue with a transaction under the provisions of POCA 2002 are also discussed.
Chapter 7 shifts the focus of the findings away from the mechanical aspects of day-to-day practice to explore participants’ perceptions of the regime. It discusses the role of the legal professional within that regime, suggesting a shift towards an acceptance of their AML role as being appropriate, reflecting an underlying maturation of the regime. The chapter then considers participants’ perceptions of the following: (i) the costs and benefits of AML compliance, (ii) SRA supervision, and enforcement of the regime, (iii) the assessment of money laundering risk, and (iv) UK law firms in a global context.
Chapter 8 draws together the conclusions made throughout the book and considers the unifying strand presented by the data: that jurisdictional issues pervade every area of practice for many participant firms. This finding highlights further the need for international co-operation in response to the international money laundering threat. The chapter makes a number of recommendations for policy and regulation flowing from those conclusions.
The remainder of this chapter contextualises the book by explaining the background to money laundering, and the money laundering methods and vulnerabilities affecting the profession.
1.2 Background to money laundering
The aim of money laundering is to convert criminal proceeds into different assets, conceal its origins or ownership, and create a patina of legitimacy.43 Various ills are attributed to laundering which coalesce to form the rationale for countermeasures in response – it capacitates crime groups, can have a corrosive effect on financial institutions, and its extent can harm legitimate capital.44
At its most basic, the money laundering process has traditionally been categorised into three components: (i) placement, where illicit proceeds are placed into a financial system, (ii) layering, where transactions are used to obscure the origin of funds, and (iii) integration, where funds are integrated into the financial system seemingly free from any criminal taint.45 Schneider identifies one further element to this process, that of repatriation, where the laundered funds are returned to the criminal ready to be used in the legitimate economy.46
Van Duyne and Levi, in their study of Dutch drug enterprises, summarised these orthodox categories derived from FATF with more nuance as follows: (i) placement – where funds are placed into the financial system, (ii) layering and ‘criss-crossing’ – dividing funds into smaller amounts and transmitting or ‘criss-crossing’ them between bank accounts, (iii) integration – where small amounts are amalgamated, (iv) justification (the ‘white-wash’ phase) – that is ‘the proper construction of laundering in the sense of pretending a legitimate source’ whilst embedding funds, and (v) embedding – where ‘the money is woven into the upperworld economy.’47 For van Duyne and Levi, however, such categorisations are of limited utility when assessing the actual ‘financial conduct’ of criminals.48
The fact that AML policy and legislation has expanded over time to encompass far more than the masquerading of ‘dirty’ assets as ‘clean’ assets has prompted some commentators such as van Duyne to suggest the more expansive concept of ‘criminal money management’ as an alternative to the term ‘money laundering’.49 However, as ‘money laundering’ is the dominant term of art in this area it will be used throughout this book. The money laundering process itself can range from the simplest of transactions to elaborate and sophisticated schemes, and as Veng Mei Leong observes, the nature of every money laundering transaction will be informed by an array of factors including, inter alia, location, the quantity of assets being laundered, the level of intimidation exercised, the ‘educational, professional and business background of the criminal’, and the cost of paying financial experts to participate in money laundering schemes.50
The Legal Sector Affinity Group AML Guidance for the sector (LSAG Guidance 2018) highlights the fact that the legal profession may be targeted by launderers at every stage of the traditional three-stage laundering cycle.51 At the placement stage, the lawyer’s client account operates as an entry point into the legitimate economy. Thereafter, funds may be layered utilising legal professionals to effect complex transactions, with the result that ‘detection can be difficult’ at this stage.52 The legal profession is still vulnerable at the integration stage as it may be utilised to effect movements of funds back into the legitimate economy via, inter alia, investment in companies, trusts, and real property on behalf of the launderers. The LSAG caution the sector that this ‘is the most difficult stage at which to detect money laundering.’53 An overarching challenge presents itself with regard to the legal profession in that many of the services that are commandeered to perform money laundering functions are used legitimately on a daily basis.54 For law firms themselves, money laundering activity brings with it multiple potential negative consequences, including both criminal and civil liability, regulatory censure and disciplinary sanction, together with inevitable reputational damage.
Launderers will involve the legal profession either because their services are required by statute to effect specific transactions such as conveyancing, or because they wish to access specialist legal services that will assist them in laundering money.55 Each transaction may also function as part of the layering process outlined above. The legal profession embodies many attractive features for a money launderer, namely respectability, providing a ‘stamp of approval’ to transactions, a client account, and the belief that legal professional privilege (LPP) will serve to dilute or block the intervention of law enforcement agencies.56 Where legal professionals are required by law to effect a transaction, they are thus rendered ‘uniquely exposed to criminality, irrespective of the attitude of the legal professional to the criminality.’57
As stated earlier, the role that lawyers perform means that in much official and academic literature, lawyers are identified as ‘gatekeepers’, terminology which reflects the fact that lawyers operate as ‘access points’ to legitimate financial systems.58 There has also been an evolving (and contested) discourse in recent years on the role of legal professionals as ‘enablers’ of money laundering.59 FATF also suggests that lawyer involvement in money laundering is an increasing trend in a number of reports.60 Domestically, the NCA states that the criminal exploitation of legal professionals ‘continues to pose a significant threat.’61
FATF acknowledges that the ‘vast majority’ of lawyers seek to comply with their statutory and ethical AML obligations.62 FATF describes the involvement of legal professionals in money laundering as a ‘continuum’ ranging from innocent or unwitting involvement through to wilful blindness, being corrupted, and complicit involvement.63 This is a more nuanced approach than the categorisation of complicit or unwitting professionals seen elsewhere in the literature.64
An exploration of the nature and extent of legal professional involvement in money laundering is outside the scope of this book. Suffice it to say at this juncture that Benson’s comprehensive review of this area prompted the following conclusion:
The role of professionals in money laundering is under-researched and poorly understood, and there remains no clear picture of the scale or nature of professionals’ involvement in money laundering activity.65
1.3 Money laundering methods and vulnerabilities affecting the legal profession
Having established that lawyers may become embroiled in the money laundering process, unwittingly or otherwise, it is helpful to consider the laundering methods affecting the profession. Part of FATF’s remit is to produce reports highlighting evolving money laundering typologies in specific sectors, with a report on the legal profession being issued in June 2013 (LP Report 2013).66 It may be recalled that the inclusion of the legal profession in the FATF Recommendations is a relatively recent measure, commencing in 2003.67 Since then, by FATF’s own admission, there has been much debate as to the evidential basis for such inclusion, intermingled with debate as to whether applying the Recommendations is inconsistent with human rights or breaches the ethical obligations owed by lawyers to their clients.68
The LP Report 2013 does not purport to be guidance or to form any policy recommendations.69 Indeed, FATF have previously acknowledged the inherent limitations with regard to typologies in the legal sector in that they are constantly evolving.70 Middleton and Levi state that lawyers deem such reports as comprising ‘lightly analysed lists of cases in multiple jurisdictions’.71 Furthermore, the case studies provided in response to FATF questionnaires for the LP Report 2013 cannot be said to present a full picture of laundering via the sector. For its part, the International Bar Association states that the LP Report 2013 is not ‘as helpful as FATF intended’ on the basis of its focus on lawyers’ knowing involvement in laundering, thus creating a ‘misleading’ impression of the profession.72
Despite such a constellation of caveats, the LP Report 2013 is still of use when deciphering money laundering vulnerabilities within the profession. The Report also highlights 42 so-called ‘red flag indicators’, ie, those factors which may be indicative of money laundering.73 The ‘red flags’ collated in the LP Report 2013 are to be considered in the context of each client relationship and are intended to assist the profession in the implementation of risk-based AML provision.74 It is the risk-based approach to AML which forms the cornerstone of the FATF Recommendations and is an approach which seeks to marry identified risks with commensurate AML provisions and resources.75
Hence the LP Report 2013 identifies ‘red flag’ indicators in relation to particular clients, particular sources of funds, the choice of legal professional involved, and the nature of the work undertaken, which may, depending on the context, assist legal professionals in their application of risk-based customer due diligence or in forming suspicions of money laundering.76 The LP Report 2013 comments that legal professionals who are unaware and uneducated in terms of money laundering risks are more vulnerable in terms of money laundering activity, and both information sharing and AML training are themes present in the interview data for this study.77
Set out below are the money laundering methods that have been identified in the LP Report 2013.78 Whilst the SRA advocates a review of these ‘typologies’ as an aid to risk assessment for each law firm, it too recognises the limitations of any trend identification, commenting that as ‘authorities become more aware of the latest schemes, criminals develop new approaches to try to evade detection.’79
1.3.1 Misuse of lawyers’ client accounts
The majority of legal professionals are subject to comprehensive restrictions on the use of their client accounts, any breaches of which will lead to disciplinary action by their respective regulators.80 Despite this, the misuse of a client account can be pivotal for a money launderer as it is capable of performing a variety of key functions.81 As well as providing a springboard to other money laundering activities such as the purchase of real property, the client account may be used as part of the process through which illicit cash funds may be converted into other assets. The client account may also provide an access route into the financial system for those clients who may find it challenging to become direct customers of financial institutions.82
The LP Report 2013 identifies three techniques utilised by money launderers in relation to the client account. The first technique involves transferring funds through the client account without the provision of legal services.83 Legal professionals in most jurisdictions (including the UK) are prohibited from acting as bankers to their clients, and an underlying transaction is required to be in place between a lawyer and client to justify the retention of client funds in the client account.84 Nonetheless, this requirement has been circumvented in a number of case studies reviewed by FATF.
In the second technique, launderers may seek legal assistance in structuring payments either to avoid any ‘threshold’ reporting requirements that apply in some (non-UK) jurisdictions, or to avoid any suspicion being aroused in relation to the transfer of funds.85 Such structuring may involve channelling transactions through third parties such as family members or into other investments.86 It follows that the lawyer may well be complicit in these circumstances.87
The third technique concerns aborted transactions. This technique involves a client commencing a seemingly legitimate transaction and depositing illicit funds in the lawyer’s client account. The sham transaction is subsequently aborted, and the lawyer will then be instructed to remit ‘clean’ funds either directly to the client or to multiple third parties or even as directed by a third party.88
1.3.2 Property purchases
The proceeds of crime may be invested in real estate without any attempt to mask its legal ownership, and the buying and selling of property using the services of a legal professional may be used as part of the placement or layering process.89 Launderers may also undertake back to back sales (known as ABC sales), a technique which utilises successive sales at inflated prices, thus absorbing more illicit funds within the transaction chain, which can then be transferred within organised crime groups.90
The ownership of real property may also be obscured either by purchasing real estate using false names or in the names of business or personal contacts.91 A more sophisticated method of obscuring ownership is via a company or trust structure, which may present a complex array of warning signs, such as the involvement of unjustifiably complicated ownership structures in unfeasible jurisdictions.92
1.3.3 Setting up and management of companies and trusts
The misuse of companies and trusts, which may be set up by a legal professional, has been repeatedly highlighted as a money laundering method on the basis that it affords launderers the potential to retain control over illicit assets whilst simultaneously obscuring their ownership.93 For example, shell companies exist without conducting business or owning any meaningful assets, but do have legitimate uses such as ‘reserving’ a company name, or as a means of facilitating corporate mergers. Their purpose in the hands of a launderer, however, is to obscure ownership of the company.94
Shelf companies are frequently used in legitimate legal transactions where a corporate vehicle is needed at short notice. Incorporated by the law firm (with employees registered as shareholders and directors), and kept in readiness, ownership is then transferred as required. From the launderer’s perspective, this may serve to add a veneer of respectability to the shelf company it acquires, as it gives the impression that the company is well established.95
Companies may also be incorporated using bearer shares. Ownership of bearer shares is passed by the physical transfer of share certificates, which is neither registered nor tracked by the issuing company, and so ideal in terms of obscuring ownership. Whilst the UK has abolished bearer shares, they are still a feature of several other jurisdictions.96
Once such entities have been set up, launderers may seek out the ongoing involvement of a lawyer in their management, acting as a trustee, nominee shareholder, or company officer for example.97 Such involvement serves to lend a veneer of respectability to the entity.98
1.3.4 Sham litigation / fictitious claims
The FATF Recommendations 2012 (updated June 2019) exclude litigation from their scope, on the basis that its exclusion protects the fundamental human right of access to justice.99 Such exclusion was reiterated at national level by the UK Court of Appeal case of Bowman v Fels but does not extend to ‘sham’ litigation (where the subject matter of litigation is fabricated or relates to unenforceable contracts based on criminal activity).100 This method is evidenced by launderers using the legal professional to recover fictitious debts or contract debts arising from criminal activity as a means of transferring funds.101
1.3.5 Managing client affairs and other methods
1.3.5.1 Managing client affairs and the use of specialised legal skills
Whilst the day-to-day management of client affairs may be vulnerable to misuse, specialised legal skills may be commandeered by launderers and used to obscure ownership and transfer assets.102 Such services may include the drafting of powers of attorney to effect the transfer of property, or a variety of other contractual arrangements.103 In addition, legal professionals involved in probate or insolvency retainers may simply unearth money laundering in respect of their deceased/insolvent client.104
1.3.5.2 Providing legal services for charities
Legal professionals can be retained at every stage of a charity’s lifecycle, from its inception, to acting as a trustee, or simply advising on its day-to-day management. These entities may be misused or even set up as vehicles for fraud and money laundering.105 As with corporate structures, the charity may be a foil to carry out transactions incompatible with its stated aims.
1.3.6 The UK – England and Wales
Echoing the findings of FATF at national level in sectoral guidance published by the Legal Sector Affinity Group, the following services are restated as areas of risk: (i) the misuse of client accounts, (ii) the sale/purchase of real property, (iii) the creation of trusts, companies, and charities, (iv) the management of trusts and companies, and (v) sham litigation.106 The UK’s National Risk Assessment 2015, which rated the profession as high risk with regard to money laundering, also echoes a number of areas already identified in the LP Report 2013 (see also the EU Supranational Risk Assessment published in 2017).107 Hence, whilst it acknowledges the ‘intelligence gaps’ surrounding high-end laundering via the sector, it identifies principal service area risks as: (i) real estate transactions, (ii) misuse of the client account, and (iii) the misuse of trust and company services.108 These areas remain the dominant areas of service risk in the subsequent National Risk Assessment in 2017, as is also the case within the SRA’s first sectoral risk assessment in 2018.109
1.4 Conclusion
This chapter has situated the book by describing the background to money laundering and exploring the methods and vulnerabilities affecting the legal profession. Against this background, Chapter 2 will examine the legislative framework within which the legal profession in England and Wales operate, under the aegis of POCA 2002 and MLR 2017. It will then provide a brief overview of AML supervision by the SRA.