Legal services are potentially vulnerable to being misused and lawyers may involuntarily be assisting in the money laundering activities of criminals.
Ill-intentioned individuals may seek legal services to provide legitimacy to their criminal transactions (financial, corporate, real estate, etc.) which are increasingly sophisticated and complex in channeling illicit funds into and through the financial system.
Why are lawyers exposed to Money Laundering risks?
- In many jurisdictions, lawyers handle client money. This means dirty money may be cleaned, involuntarily, by simply putting it into their client account (or an escrow account).
- Legal services provided by lawyers are methods that criminals can use to facilitate money laundering (e.g., setting up a company).
- Criminals wanting their activities to appear legitimate seek the involvement of a lawyer, since engaging a lawyer adds an appearance of legitimacy to the undertaken activities.
What legal services are most vulnerable to Money Laundering risks?
According to FATF (not the legal profession), the following legal services may particularly be susceptible to misuse by criminals in the context of money laundering and terrorism financing:
Use of client accounts
The use of the client account by a lawyer may be attractive to criminals as it can:
- Serve to help hide ownership of criminally derived funds or other assets.
- Be the first step in converting the proceeds of crime into other less suspicious assets.
- Be used as an link between different money laundering techniques, such as purchasing real estate, setting up shell companies and transferring the proceeds of crime.
- Permit access to the financial system for a criminal that may be suspicious to a financial institution as a customer.
Purchase of real estate
Statistics from Suspicious Transactions Reports and confiscated assets reports compiled by FATF show that real estate assets formed 30% of all criminal assets in the years 2011–2013, highlighting that criminals tend to channel a large chunk of their illegal funds into the financial system through the guise of property purchases and sales.
Creation of companies/charities
Companies and charities are seen by criminals as potentially useful means to maintain control over criminally derived assets while impeding the ability of law enforcement agencies to trace the origin/ownership of the assets. Most common techniques include:
- Creation of holding and offshore companies to obscure ownership and retain control.
- Creation of shell companies to place or layer.
- Use of bearer shares to conceal real ownership.
Management of companies/charities
Criminals will often seek to have lawyers involved in the management of their companies (e.g. by offering a membership of the Board of Directors) because of their ethical and professional obligation in order to provide greater respectability and legitimacy to the entity and its activities.
In the case of Bowman v Fels, the English Court of Appeal held that while genuine litigation should be exempt from the reporting requirements, fake litigation would not since such litigation is an abuse of the court’s processes. In fact, a litigation could be considered as fake, and therefore considered as a money laundering red flag, if the subject of the dispute was fabricated (e.g. if there is no actual debt and the funds being transferred are the proceeds of crime being passed from one entity to another).
How may lawyers be exposed to Money Laundering risks?
Potentially, a lawyer’s involvement may range from intentional involvement (e.g. being wholly complicit in the criminal activity) through wilful blindness or negligent involvement to involuntary involvement.
The legal profession does not tolerate the actions of any lawyer who knowingly participates in the criminal activity of a client, regardless of whether it is related to money laundering. This being said, it is realistic to admit that even the most vigilant of lawyers may have difficulty identifying transactions or funds that are infected with illicit origin when criminal proceeds have already been laundered, especially that the patterns of money laundering are constantly evolving, so the red flags of today may need to be updated tomorrow to accommodate new typologies.
It might also be difficult for lawyers to completely avoid innocent involvement because in some circumstances, there are no apparent red flag indicators. There is nothing to alert even the most suspicious lawyer. Nevertheless, if the activities of a client or a party to a client’s transaction raise suspicions, a lawyer should apply the procedures defined by the Beirut Bar Association in application of the last paragraph of article 5 of Law No. 44 dated 24/11/2015 related to Fighting Money Laundering. The lawyer, however, must be careful not to disclose to the client the fact that he is being reported given the no tipping-off provisions that accompany rules requiring suspicious transaction reporting.
In all cases, even where red flag indicators do not sufficiently raise the suspicion of money laundering, the lawyer ought to consider whether there are grounds to inquire more of a client to remove concerns about the source of funds being used in the transaction.
A lack of information should also raise concerns. A client’s evasiveness or unwillingness to give answers should arouse suspicion that the lawyer’s services are being misused, especially if there are other red flag indicators. The lawyer may need to establish whether the client has legitimate reasons for withholding information (e.g., concerns around breaching confidentiality agreements) or whether the client’s evasiveness is an indication of underlying criminal intentions.