Money talks

With the European Parliament poised for a crunch vote on the third money laundering directive, lawyers and others are involved in intensive lobbying to protect professional privilege, reports Philip Hoult

Last month’s Court of Appeal decision in Bowman v Fels was widely hailed as a significant step forward in clarifying the responsibilities of lawyers under UK money laundering legislation (see [2005] Gazette, 10 March, 1). It was also seen as a victory for the Law Society and the Bar Council, which both intervened in the case.

But the court’s ruling ([2005] EWCA Civ 226) – principally that lawyers advising clients in the course of litigation are exempt from requirements under the Proceeds of Crime Act 2002 (POCA) to report suspicions of money laundering – was just one of the fronts on which the Law Society, together with other legal professional bodies such as the Council of Bars and Law Societies of Europe (CCBE), has been fighting in the field of money laundering.


Next week, the European Parliament’s civil liberties committee – its lead committee on the proposed third money laundering directive – is set to vote at a crunch meeting on its drafting.


The third directive contains a new definition of ‘serious offences’, creates tighter provisions on customer identification and verification, and makes tipping-off a mandatory offence. It is as controversial as its predecessors.


This is in part because the second directive passed in 2001 contained an express commitment to review its impact on lawyers before any further legislation was introduced, and this pledge appears to have been completely ignored.


‘Why have so much, so soon?’ asks Louise Delahunty, a partner at Lndon-based criminal and fraud law practice Peters & Peters, and former chairwoman of the Law Society’s money laundering task force. ‘We have even got some countries which have not yet fully implemented the second directive.’


Last October, the European Commission initiated proceedings against Greece and Sweden for their failure in this regard. Critics also stress the significant variations in the approach taken by those member states that have actually implemented the second directive.


Concerns over the speed of developments on the third directive prompted European bar leaders earlier this year to send an unprecedented open letter to the three main branches of EU government, calling for a delay until the promised impact assessment has been carried out (see [2005] Gazette, 10 February, 1). However, as Ms Delahunty acknowledges, ‘there is a political will driving this forward, so the timetable will probably not be delayed’.

As a result, the Law Society, the CCBE and others have been engaging in intensive lobbying in a bid to affect the third directive’s contents.


Perhaps the most worrying aspect for UK lawyers is the wording of the directive’s prohibition on tipping-off. In a letter to the Treasury earlier this year, the Law Society wrote of its ‘growing concern’ and called for the preservation of POCA’s safeguards for situations governed by legal professional privilege. ‘We would be very concerned at any suggestion that our domestic legislation might have to follow the apparent requirements of the EU directive on that score,’ it said.


Alison Matthews, money laundering reporting officer (MLRO) at national firm Irwin Mitchell and a member of the Law Society’s task force, says it is pressing for the inclusion in the third directive of a clear protection of privilege.


‘Bowman v Fels was a very clear statement that privilege was a fundamental human right that needs to be protected,’ she says. ‘The problem with the wording of the third directive is that protection in relation to tipping-off is lost. If the amendments we are proposing do not go through, then that will put the UK’s position in jeopardy.’


Leading City firms such as Lovells and Linklaters have, meanwhile – with the help of the Law Society both in Brussels and London – been active in tabling amendments to the directive through MEPs. What these firms would particularly like to see is clearer mutual recognition arrangements for client identification as, according to Lovells’ MLRO and chief operating officer Nick Cray, the current situation is a ‘complete bureaucratic nightmare’.


‘Every jurisdiction has implemented the verification requirements in a different way,’ he says. ‘For international firms with many offices, you try and set an acceptable standard [of verification] for all of them. What you do not want is another jurisdiction to come in and say it is going to set a higher standard, requiring you to have to do verification all over again.’ Firms would ideally like their offices to be able to rely on checks already made by another branch in a different country.


A second key amendment tabled by City firms relates to the identification requirements for companies, which are based on the recommendation by the Financial Action Task Force – the inter-governmental standard-setting body on the fight against money laundering and terrorist financing – that firms should understand the economic ownership of the entity for which they are working.


‘With a corporate, that’s fine, unless you are starting to work for a company in a group,’ Mr Cray suggests. ‘You may be asked to act for a French company and find that its parent company is in Italy. But the French share registry does not have shareholder information. It is a ludicrous situation that we have to track down who the shareholders are when the company is a registered entity.


‘We are forced into an investigation that drives the clients mad – gaining verification evidence on corporates is the biggest single problem with money laundering [rules].’


Mr Cray says what City firms would like to see is a system where if they verify that the corporate is properly set up and structured, and if there are no other high-risk factors, that should be enough to the extent that no more information is available from the corporate registry.


A third important area where the Law Society, this time alongside the Society of Trusts and Estate Practitioners, is trying to sway MEPs’ thinking arises from fears that the third directive will have an impact on trusts ‘far beyond the objectives of combating money laundering’ (see [2005] Gazette, 17 February, 5).

Toby Graham, head of the contentious trusts practice at City firm Taylor Wessing, warns that the proposals ‘have not been properly thought through’ when it comes to trusts. Although progress has been made in taking the corporate bond market in the City out of the scope of the directive and in simplifying the requirements to identify the beneficiaries of a trust, attempts to remove certain low-risk trusts from the directive – such as trusts arising on intestacy and in cases of joint property ownership – have so far met with less success.


‘One of the things that does bother me about all of this is that there is a lot of policy based around a complete lack of evidence about there being a problem,’ Mr Graham says. ‘There is no evidence as far as I am aware of the use of trusts by money launderers and terrorists. There’s a great misunderstanding [about their use].’ He adds that equivalent products in civil jurisdictions will not be subject to the same burdens, leaving the UK and Ireland at a competitive disadvantage.


Of course, the key question is whether all these lobbying efforts will pay off.


One of the main reasons why they are being made now is that when the UK government implemented the second directive, through POCA, it actually went much farther than many other jurisdictions and produced ‘gold-plated’ legislation.


This time around, the Treasury has been making encouraging noises to the effect that it will aim to ensure that the third directive is implemented in a way that promotes a ‘risk-based and proportionate’ approach.


Amendments to the UK’s money laundering legislation contained in the Serious Organised Crime and Police Bill, which received Royal assent this month on the last day of Parliament before the election, also suggest that the government is prepared to take on board at least some of the legal profession’s concerns. These include the introduction of the so-called Spanish bullfighter exemption, which provides a defence where the conduct giving rise to the proceeds of crime is lawful overseas.


Nevertheless, there are considerable worries that the EU’s ‘comitology’ process – its implementation committee procedures – may not leave the government with a great deal of room to manoeuvre.


Next week’s vote of the civil liberties committee will therefore be eagerly awaited. Hartmut Nassauer, a German MEP and the committee’s lead rapporteur, has produced an opinion recommending several amendments that are seen as favourable to lawyers, and has received the backing of the CCBE.


Whether these recommendations will be adopted in full remains to be seen. Liberal Democrat MEP Diana Wallis, a solicitor who drafted the opinion of the European Parliament’s legal affairs committee on the third directive, which also put forward amendments, predicts that MEPs are likely to follow Mr Nassauer’s line.‘There is a reasonable consensus in the parliament that there are problems with how [the third directive] affects lawyers, and that the way the commission brought this forward without properly reviewing the second directive has been a bit hasty,’ she says.


Irwin Mitchell’s Ms Matthews is also confident. ‘We have a lot of MEPs already on board,’ she says.


Whichever way the civil liberties committee votes on 26 April, there is momentum. A first reading of the directive in the European Parliament is expected at its plenary in May, with the Council of Ministers hoping to adopt it in June or July. Member states will then have between 12 and 18 months in which to implement it into domestic legislation.

So a battle may be lost or won next week, but the war is unlikely to be over.