Family lawyers have unexpectedly faced a lot of problems with recent anti-money laundering legislation.

Mark Smulian investigates how the Proceeds of Crime Act 2002 is working

As an example of the law of unintended consequences, the Proceeds of Crime Act (POCA) 2002 takes some beating.

It was meant to combat money laundering by compelling solicitors and other professional advisers to tell the National Criminal Intelligence Service (NCIS) if information came to their attention that clients were engaged in dubious financial dealings.

Solicitors must notify NCIS if they know, suspect, or should reasonably know or suspect, that a client is engaged in money laundering and that the information requires disclosure.

Organised crime figures were expected to be the chief objects of this attention - criminals who use sophisticated methods to launder some 25 billion each year, according to NCIS.

This has happened, but in assessing how the law has worked, family law solicitors quickly come into the equation.

They have also found themselves having to inform NCIS if they discover, for example, that one party to a divorce case is not declaring income for tax.

At its extreme, Marilyn Stowe, chief assessor to the Law Society's family law panel, points out 'if a cleaner tells you she gets paid 25 in cash, and the Inland Revenue does not know, you should report it'.

Is a law aimed at Mr Big also ensnaring Mrs Mop?

The POCA contains no de minimis level, so everything is caught.

Louise Delahunty, a partner at London firm Peters & Peters and chairwoman of the Law Society's money laundering task force, said the Society lobbied for de minimis, but the government wanted the wider test.

However, NCIS has now introduced an abbreviated reporting system for matters of limited intelligence value.

With heavy penalties and the danger of committing criminal offence hanging over solicitors, most err on the side of notifying NCIS of everything remotely relevant.

This has contributed to an uncontrollable flood of information landing on the NCIS, most of it concerning matters too minor to be useful to its investigators.

The agency says reporting doubled to 60,000 in the year to 2002, and kept growing last year.

'The sheer volume of reporting has posed significant challenges for the financial institutions, NCIS, and investigators alike,' a spokesman notes with some understatement.

Ms Stowe, a partner at the Harrogate office of Grahame Stowe Bateson, says: 'Family lawyers are obliged to consider each case in the context of the money laundering legislation and regulations.

'It is a very worrying issue, as practitioners are aware that if they make an error they are likely to pay the consequences with their career and possibly their liberty.

'I'm worried in particular about high street lawyers, who could find themselves unwittingly in serious trouble, because this is a specialist area.'

Not that they can look to judges for help.

Ms Stowe says the judiciary 'does not always seem to be au fait with the money laundering legislation and in some cases quite simply does not recognise a problem or know what to do'.

She sought a direction from one court in a case and found none of the judges would deal with it.

A letter to the liaison judge on the subject went unanswered.

Family solicitors have to make reports even if, for example, they are handling a divorce case where the husband's declared income cannot possibly match his lifestyle.

This is a money laundering issue.

'You have got to consider reporting it because the two things don't add up and there may be undeclared income,' she says.

Michael Potts, a partner at London-based fraud specialist Byrne & Partners, also thinks family lawyers have suffered collateral damage from the POCA.

'While criminal lawyers would be aware of this issue, and corporate ones would always have had half an eye on it, it has really hit family lawyers,' he says.

'There is a massive problem with [disclosures concerning] spouse's assets.

A lot of practitioners thought it did not affect them but then panicked into disclosing things no matter how small.

It means NCIS has been deluged by trivial reports.'

Undeclared income was never intended to be the main target of the POCA, yet the volume of reports means 'the Inland Revenue is rubbing its hands at the information it is getting', he says.

However, Ms Delahunty says: 'NCIS now has much greater comprehension of solicitors' problems, and issues arising for family lawyers, particularly those of consent under POCA.'

Inextricably bound up with the idea of solicitors reporting their clients to NCIS is the issue of professional privilege in discussions between solicitors and clients.

In theory, privilege applies even if money laundering comes to light.

But solicitors can seldom make much use of information without disclosing it to someone who is not covered by privilege.

Ms Stowe gives an example: 'Suppose a husband wants to buy his wife's share of a home and proposes to do so with a mortgage he apparently can't sustain on paper.

How can your client proceed or the court be asked to make an order without first contacting NCIS?

'People go to see solicitors and assume that what they say is confidential, but in relation to money laundering, it isn't.'

This is an issue that worries Christopher Murray, head of criminal law at London firm Kingsley Napley.

He says: 'I don't think anyone with their hand on their heart could say that they expected the largest group affected by POCA to be family lawyers, and I'm absolutely certain that the people who drafted the legislation did not expect it because it was not intended to attack that problem.'

He says that 70%-80% of the reports to NCIS come from lawyers and of those, 70%-80% are from family lawyers.

Privilege remains a grey area that is yet to benefit from any clarifying court decisions, Mr Murray says.

It is not an offence to withhold disclosure if a 'professional legal adviser' is given information in privileged circumstances from a client or a person seeking legal advice.

However, this is less of a clear concession to solicitors than it appears.

Mr Murray explains: 'It sounds all right but the problem is that the defence applies only to professional legal advisers.

But expert witnesses, for example, are not professional legal advisers, so there is a potential difficulty in a lot of litigation if, as soon as you go to an expert, the privilege is lost.

The danger is that they would then commit a criminal offence if they did not pass on the information to NCIS.'

The government tried to deal with this by an amendment that gave privilege where information is communicated as part of 'internal reporting'.

Mr Murray says: 'It is questionable whether accountants would feel that gives them sufficient protection because it is not clear whether they would be considered "internal".

'Privilege will cover talks with clients, but once you have got the information you cannot move the case on without committing an offence.'

Ms Delahunty adds: 'The option to report as a defence to section 328 of POCA should be distinguished from the section 330 obligation to report, which only affects family lawyers dealing with transactions in the regulated sector but which has the legal privilege defence.'

A related but unforeseen problem arises with prosecution disclosures to the defence.

If a solicitor reports a client to NCIS and then drops the case, but the former client is at some later point prosecuted, the original solicitor's report to NCIS might turn up among disclosures.

Mr Murray says: 'The ramifications of that are considerable, ranging from the commercial future of a firm that became known for grassing up its clients, through to the physical safety of the solicitor depending on the nature of the client.

'That has got be sorted out by assurances that there will be protection, but it is hugely complex.'

A more relaxed view of POCA's working comes from Philip Way, a partner at national firm Addleshaw Goddard and chairman of the Solicitors Family Law Association's POCA working party.

He says the association has received 'robust' advice from leading counsel on the privilege issue.

'They took the view that privilege would be lost only if solicitors knew or should have known that the information was given in furtherance of a criminal purpose,' he says.

Mr Way urges solicitors to keep POCA's requirements 'very firmly under review as a case progresses', in case anything that should be disclosed emerges.

Practitioners appear to be advising clients at an early stage about the effects of POCA before they learn anything about their client's circumstances, says Mr Way, who adds that he even knows of a few cases of clients curtailing divorce proceedings once POCA's effects are explained.

He says: 'POCA felt very uncomfortable at the beginning, but I think it is working out in practice.'

Mark Smulian is a freelance journalist