Special Report: Anti-money laundering & the taint of dirty business

Avoiding the dirty money trail could be as convoluted as getting trapped in it. Angela Priestley explores some of the concerns facing the legal industry as it prepares to be captured in the…

Promoted by Lawyers Weekly 27 June 2008 Big Law
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Avoiding the dirty money trail could be as convoluted as getting trapped in it. Angela Priestley explores some of the concerns facing the legal industry as it prepares to be captured in the anti-money laundering net.

A client has just stepped off the boat from the Cook Islands. Whether or not they're a likely culprit for money laundering activities, or just returning from a bout of much-needed sunshine, remains to be seen. But one thing for sure is that reporting obligations under the Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) Act will soon change the legal landscape, making both high-risk and low-risk clients alike subject to suspicious matter reporting.

A dirty trend

The figures vary on the extent to which money is laundered in Australia - a situation itself representing just how confusing determining what is and is not "dirty money" can actually be. The Attorney General's Department puts the price tag at around $11 billion, while the Australian Institute of Criminology is a little more conservative, putting the figure somewhere closer to $4.5 billion.

No matter what the price tag, the cost in battling the money laundering problem will also be dire, and soon hit law firms large and small by way of the second tranche of designated services required to undertake reporting activities under AML/CTF.

Again, it's difficult to estimate what the cost might be on a large firm, but already banks and financial services captured in tranche one have been bearing the brunt. ANZ Bank has publicly stated it expects to spend $66 million on the new AM L law in the next three years.

But then the risks of not taking action could mean that a good deal of the US$1 trillion which KPMG estimates goes missing each year globally will continue to grow and lawyers may, unwittingly or not, continue to be the conduits through which criminals filter the knowledge of their crimes.

It's here that difficulties in regulating the legal profession against money laundering emerge. According to Alison Deitz, partner at Deacons, aside from the few lawyers who are willingly involved in some form of criminal activity, it can be extremely difficult for lawyers to ever actually know they're being used in the process of money laundering.

For these reasons, the examples of how and where lawyers are used are few, making regulating, monitoring and reporting on "suspicious" activities a difficult task.

Muddy waters

The Australian Transaction Reports and Analysis Centre (AUSTRAC) remains tight-lipped about the scenarios that may confront lawyers unwittingly trapped in the process of money laundering.

Liz Atkins, Austrac's acting general manager, says she's concerned about giving "too many ideas away" but has already drawn a number of typologies from the United Kingdom where suspicious matter reporting has been happening for some time now.

"A lot of it does revolve around the conveyancing type of areas, and use of a solicitor's trust account," she says. "For whatever reason, the property deal doesn't go ahead and they then get a refund via a cheque from the solicitor for the amount of money they put in for a deposit."

Last year, the second tranche of the legislation was slated when the former government released an exposure draft of designated services to be captured by the Act. It was a broad list, capturing the services of lawyers, accountants, real estate agents, and other forms of business providing a professional service.

Since then, the government has held a consultation process to get feedback from various groups on how the legislation will stick. An amendment bill, issued as an exposure draft, is due for release later this year.

It's these designated services that are causing some friction among legal communities. Initially published as a rough draft, just what is and is not deemed a designated service under the second tranche of the legislation is still up for discussion.

Peter Jones, a partner at Allens Arthur Robinson says the number-one priority should be that the list is clear: "So that a judge can interpret it and that lawyers can get a precise answer as to what is and is not captured for the purpose of working out if someone is going to suffer a civil penalty - or even go to jail for that matter," he says.

Revising the list has been an arduous process, but one Atkins says is well on its way to ensuring the appropriate industries will be picked up in the second tranche. "There are no assumptions that everything will apply," she says.

Clarity is essential, but then consistency across all services could be the number-one rule for a large firm getting on top of their AML compliance obligations. Jones says he expects AML to pan out at Allens in a blanketed way. "It's much easier for us to have one system that applies to every new client regardless of the matter that they're going to engage us on," he says.

"I don't think we will be cherry picking clients and saying: 'That client isn't an AML client and that one is.' We need to be practical about it."

Obligation to spy

Another slated concern is the extent to which the legislation impacts on the existing services provided by lawyers - and notably, how suspicious matter obligations required to be reported under the Act will impact on client confidentiality. Deitz says that, under such obligations, any secret "dobbing in" of clients to the regulator could conflict with client relationship.

While the legislation does at present retain legal professional privilege, any communication outside of such conversations where suspicious behaviour is noted would be required to be reported. "The concern for the profession," says Dietz, "is that clients who expect to go to a lawyer being able to give full and frank disclosure will not be able to do that. There will be a question of accessibility to justice."

Outside of issues of client privilege, some legal circles have argued that the industry is regulated enough and simply does not need additional compliance procedures to be concerned with.

The idea sparks a mixed response. According to Jones: "We're flogging a dead horse on that one. This hasn't been accepted in any other jurisdiction in the world as far as I'm aware."

But Dietz says that, given the scope of the legal profession, there are a lot of activities currently undertaken by lawyers that have no relationship to money laundering whatsoever. "How can money be used as a conduit through law firms?" asks Dietz. "There really are limited examples. At the international level, that's been something lawyers have wanted to find out. Lawyers need to understand how they are being used."

Polluting the industry

Is the industry regulated enough? That might be so, says Chris Cass, AML expert at Deloitte, but if an industry is not regulated from a financial crime perspective, then it's simply not sufficient.

"You don't have a specific obligation so far to have controls and processes in place to identify and report on financial crime incidents," he says. "I know they do (lawyers) have an obligation under ethics and law society requirements and local legislations, but this new obligation is specific for preventing money laundering."

In a large law firm - where the capability for advising on AML to financial services in the first tranche of the legislation is already under way - understanding reporting obligations and procedures under AML could be relatively straightforward.

The situation differs drastically for a smaller firm, especially a solo practitioner who will find they need to deal with the added reporting procedures. Dietz says: "There certainly needs, to the extent the profession is already covered, [to be] a recognition that the industry is heavily regulated, that we do already have obligations. This is another set of compliance obligations that will make it very hard for those in smaller practices to cope."

Know a foul smell

Cass says the "know your customer" conundrum set out in the legislation is not necessarily all that different to what law firms are already doing now. "If I go to my lawyer, they should, on my first day, take all my details about who I am, where I live," he says.

"This will be slightly extended under AML, as you will not have to identify who your customer is, but you will also have to verify their identity, which means checking back to original documents."

That said, the mechanism for reporting will still need to be put in place, especially the ability to effectively monitor transactions undertaken for clients. "There are systems that they will need to put in place and I'm not under-estimating this," says Cass. "This is a compliance challenge.

"It's new for many organisations - but it's simply a recognition that accountants and lawyers advertently or inadvertedly can be used to facilitate the laundering of proceeds of crime."

If that's true - and if lawyers, accountants and the like are really the unwitting pawns in a global game of dirty money - then making the investment to get one move ahead of the criminals could not just clean up billions of dollars, but also mitigate the risk factors facing businesses everywhere.