A raft of measures to prevent money laundering highlights the difficulty lawyers face in holding confidential financial information for clients in a high-tech world.
The treatment of clients’ money has, surprisingly, become a hot topic. Who would have thought that so many developments would occur at once (three different strands). Is there a moral here?
The longest-running story emerges from the current draft money laundering directive, the discussions on which are about to be revived (now that the period of European elections and the appointment of commissioners is drawing to a close). You may recall that this is the 4th money laundering directive, and lawyers have been caught in the coils of the series since the 2nd directive, which was the one which introduced the notorious reporting duty around suspicious transactions. The current draft 4th directive was some way through its legislative process when it was noticed there was a difference in the treatment of what are called pooled accounts (which we know as client accounts) between this version and the 3rd directive.
According to the 3rd directive (Article 11.2.b), member states may allow customer due diligence not to be applied in respect of beneficial owners of pooled accounts run by independent legal professionals. This is good, because it eliminates a burden which would otherwise be considerable. The 4th directive aims to abolish this explicit exception. The authorities feel that the simplified due diligence provisions in the 3rd directive are overly permissive, because certain categories of client or transaction are given outright exemption. The revised directive proposes to tighten the rules. Under the new system, it would be left to the member states to determine which areas they believe present a lower risk, so resulting in simplified customer due diligence measures (article 13 of 4th directive).
My organisation, the Council of Bars and Law Societies of Europe (CCBE), believes that the current system of pooled accounts works smoothly, and meets the requirements of preventing money laundering. The Law Society agrees. If pooled accounts for lawyers are abolished, lawyers would have to open a separate account for each individual case, then make a separate transfer from that account and close the account afterwards, which would be extremely burdensome. The lobbying on this point continues.
Now along come two further measures, from different sources, both dealing with tax compliance. The first is the US Foreign Account Tax Compliance Act (FATCA). You might have read about it, as it is causing US citizens living abroad to give up their citizenship in increasing numbers. FATCA requires such citizens to report their financial accounts held outside the country, and – more to the point – requires foreign financial institutions to report to the US Internal Revenue Service about their US clients. (Unlike other developed countries, the US levies income tax on citizens regardless of residence, and requires citizens living abroad to pay US taxes on foreign income.) Although the act was passed in 2010, the reporting obligation has been introduced just this summer. Foreign banks are in any case suffering heavy fines at the moment from the long arm of US law, and so there are reports of foreign banks refusing to take on US citizens as customers, because of the risk of suffering penalties for not reporting back properly under FATCA. It does not take too much imagination to see that pooled accounts might not be a favourite of such banks, since in among the many deposits pooled in one lawyer’s accounts might lurk a US citizen.
The third strand comes from the OECD in Paris. It has just published its ‘Standard for Automatic Exchange of Financial Information in Tax Matters’, which it describes as a new single global standard between key authorities worldwide. It might be described more accurately as ‘Son of FATCA’, but on a world-wide basis. Here the problem relates to the confidentiality of the information. Although section 5 of the Standard deals (briefly) with confidentiality, including provisions limiting the use of the information exchanged, the question is whether the level of the Standard’s confidentiality is the equivalent of the strict requirements binding lawyers under ethical and legal rules. What are we to do if client financial information held by lawyers is transferred automatically out of the country?
There is a moral here (sorry). Technology and globalisation have made passage around the world easier. Everything is becoming quicker and easier all the time. But villains have taken advantage of it for their own ends. So now air travel is slowed up by queues to take off our shoes and hand over bottles of liquids. Similarly, opening and running a bank account for clients is made difficult to the point of impossible because others shift their money around to hide its provenance or to avoid paying taxes. The annoyance of travelling by donkey cart and communicating by smoke signals has been replaced by airport pat-downs and due diligence forms.
Jonathan Goldsmith is secretary general of the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs