Money laundering consultation paper
Consultation issued by the Law Society on minimising the risk of money laundering and proposed amendments to the accounts rules
Introduction
1.
The Law Society's Regulation Review Working Party (RRWP) would like your views on the need for a new rule to deal with the proper use of client account, and on the form such a rule might take.
2.
The mischief which the new rule would seek to prevent is the use of solicitors' client accounts for money laundering and other illegal purposes.
The aim would be to help maintain the duty of a solicitor to act with integrity and in a way which does not damage the reputation of the profession.
A proposed draft rule is annexed to this paper.
In short, save in exceptional circumstances, it prohibits the use of a solicitor's accounts where there is no underlying transaction or provision of solicitor-like services.
3.
Your comments are invited by 1 July 2003.
A set of questions appears at the end of this paper, including a section for general comment.
Background
4.
The approach of RRWP is to be deregulatory, so long as this is consistent with maintaining the necessary public protections.
RRWP is seeking to simplify the rules wherever possible with the aim that they should protect the public without being over-burdensome.
5.
RRWP has agreed that all rules should meet the following criteria:
l Necessary - they must relate to solicitors' proper duties to society and the reasonable expectations of clients;
l Clear - they must be open and user friendly for solicitors, clients and regulators;
l Fair - to clients, the administration of justice and to solicitors;
l Enforceable - to provide a system that works and meets the expectations of solicitors and clients;
l Proportionate - to the risk and not over-burdensome;
l Targeted - focused on the problem and minimising side- effects on those who do not present a risk;
l Consistent - with other rules and with the Society's wider regulatory priorities, achieving proper integration and internal coherence.
6.
If you would like to know more about the background to the rules review or to look at previous consultations, see the Society's Web site at www.lawsociety.org.uk (go to View all Contents A-Z: Rules Review and/or View all Specialisms>Our services>Rules Review).
7.
Solicitors have been warned about money laundering and banking instrument fraud through Gazette articles and the blue and yellow warning cards issued by the Law Society.
Guidance on the money laundering legislation has been available from the Society since 1994 and is now in its second edition.
Updates were issued in February and September 2002, highlighting changes to the legislation.
A series of roadshows across the country took place between February and October 2002.
(Copies of the guidance are available from Professional Ethics, tel: 0870 606 2577.)
8.
Note (ix) to rule 15 of the Solicitors' Accounts Rules 1998 states that:
'Solicitors may need to exercise caution if asked to provide banking facilities through a client account.
There are criminal sanctions against assisting money launderers.'
A general warning of this nature was considered sufficient when the rules were drafted in 1996/1997.
However, the dangers of money laundering through solicitors have become more apparent and the legislation is becoming more onerous.
Do we need a new rule?
9.
Very broadly there are two views to be balanced.
One view is that a rule is not necessary because solicitors' responsibilities in relation to money laundering are set out in criminal law and the Money Laundering Regulations, and because there is a clear professional duty not to act dishonestly.
The contrary view is that a responsible regulator should make every effort to prevent money laundering through the profession, both in the general public interest and in order to protect the reputation of the profession.
A rule would spell out how honest solicitors should act, and enable the Society to take effective action against those who breach the rule.
Arguments for a new rule
10.
The Society's function under section 31 of the Solicitors Act 1974 is to make rules in the public interest.
Money laundering is a matter of serious public concern (the underlying criminality is often violent and related to drugs trafficking) and it is clear that some solicitors are involved.
A solicitor's dishonesty, whether leading to criminal prosecution or not, is a legitimate concern of the Society, which has powers of intervention and striking-off in such circumstances.
Breaches of the accounts and other rules can also lead to disciplinary action.
The role of the Law Society in helping to combat money laundering is likely to be more effective if it can address underlying behaviours, rather than having to concentrate on proving dishonesty or some form of knowledge or suspicion.
Effective regulation is arguably more effective than criminal prosecution in protecting the public from money laundering.
11.
The substantive provisions of the money laundering legislation apply widely and impose sanctions on those who assist money launderers.
Solicitors are attractive to launderers because of the credibility provided by their involvement in the transmission of money and the anonymity afforded by client confidentiality.
They are likely to become more attractive as the anti-money laundering regulation of financial services institutions becomes ever tighter, although solicitors also are becoming subject to tighter regulation.
Solicitors are also vulnerable to launderers because they are gatekeepers to the integration process, whereby the proceeds of crime are used to purchase property or businesses.
There is a danger that solicitors become involved in money laundering without realising it and are then vulnerable to criminal proceedings.
The existence of a rule might serve to reinforce the law, including any obligations under the Money Laundering Regulations, and make it easier for solicitors to refuse inappropriate instructions.
12.
Solicitors are not bankers but appear in some cases to be providing what in effect amount to banking facilities.
They may facilitate laundering by providing credibility and anonymity to the transmission of money (and put themselves at risk by so doing).
13.
Many millions of pounds are transacted through solicitors' client accounts each year, giving a wide scope for abuse by money launderers.
A responsible regulator should seek to prevent solicitors becoming the target of criminals.
14.
Solicitors need to know with reasonable certainty what will be regarded as misconduct.
A specific rule will provide a measure against which solicitors can decide whether it is appropriate to accept instructions from a client, and prevent solicitors rationalising their conduct on the basis that there is no clear prohibition.
There should be no ambiguity to allow solicitors who are tempted, or under pressure, to persuade themselves that they are not acting wrongfully.
A solicitor was recently fined by the Solicitors Disciplinary Tribunal for contravening practice rule 1(a) and (d) by facilitating financial transactions for a client in circumstances where there were no underlying legal transactions.
Although money laundering and dishonesty were not in issue, the solicitor had allowed his client account to be used for the convenience of a business client.
If there had been a clear rule prohibiting this type of conduct, the solicitor might not have found himself in this position.
In the absence of a specific rule, solicitors have to judge what the tribunal would find to be a breach of the principles in practice rule 1 not to compromise their independence or integrity, or the good repute of themselves and the profession.
15.
There is a perception (as reported in the press) that solicitors are unwilling to report suspicious circumstances to the authorities.
A new rule would demonstrate that the Law Society and the profession take the problem seriously.
16.
A specific rule would enable the Office for the Supervision of Solicitors to deal more effectively with such cases, whether or not the solicitor is knowingly involved in money laundering.
The Law Society faces very difficult decisions about whether or not to intervene in cases involving the transfer of substantial funds where there is no usable evidence of the underlying criminality.
It can be very difficult to make the connection to the crime in respect of which the laundering takes place, as solicitors are usually at some distance from the original criminality.
Breach of a specific rule, on the other hand, would enable the Society to deal speedily (and probably at lower cost) with such cases.
A rule which addresses underlying behaviours supportive of money laundering is more likely to prevent money laundering than attempts to prove that a solicitor is dishonestly assisting in a criminal enterprise.
While recent cases offer much support for strong regulatory action (including the case referred to in paragraph 14 above), a clear prohibition is preferable.
Arguments against a new rule
17.
It is not generally a function of professional rules to replicate criminal legislation except where there is clear justification to do so.
Having said that, the government is increasingly relying on regulators to be proactive in dealing with financial crime in their particular sector.
18.
The implementation of the second European Money Laundering Directive (by June 2003) is likely to mean that in future most solicitors will be required to comply with the Money Laundering Regulations.
It is hoped that compliance with the regulations, in particular checking client identity, will help the profession to avoid committing offences under the substantive provisions of the money laundering legislation.
Making early compulsory checks should alert solicitors to potential problems.
The Law Society of Scotland shares this view and already requires Scottish solicitors to comply with the regulations.
19.
The Proceeds of Crime Act 2002 consolidates and amends the substantive law on money laundering.
As from 24 February 2003, the 'failure to report' offence applies to any criminal conduct underlying money laundering, and solicitors will be judged by the standard of whether a reasonable solicitor should have been suspicious in all the circumstances.
The combined effect of the Act and regulations (see paragraph 18 above) may prevent the type of behaviour targeted by the proposed rule and make a new rule unnecessary.
20.
Any rule should be sufficiently flexible to allow honest solicitors the freedom to develop a wide range of services in the interests of clients, but still target activities which cause concern.
It may be difficult to draft a rule which achieves both these objectives.
New initiatives eventually become part of what is regarded as the normal business of a solicitor's practice.
A rule may stifle such initiatives to the detriment of the profession and its clients and be anti-competitive in effect.
21.
It is not clear how many cases of suspected money laundering relate to deliberately dishonest solicitors who would be likely to ignore a new rule in any event.
22.
A new rule is unnecessary and disproportionate as the majority of solicitors refuse to act for clients who try to use them as a bank.
Guidance from the Law Society is a more appropriate means of helping the profession to understand and resist potential money laundering situations.
23.
The Society should concentrate on providing clear and helpful guidance on the new legislation and revised Money Laundering Regulations.
Although any guidance issued is primarily to assist solicitors, it may be used against solicitors in conduct proceedings when appropriate.
What form should any new rule take?
24.
A draft rule is attached to this paper.
The draft rule proposes an extension of the accounts rules as it is aimed at the use of solicitors' client accounts.
Amending the accounts rules raises the issue of the extent of the work carried out by reporting accountants.
The draft rule suggests that reporting accountants check for compliance with the rule in relation to the client and controlled trust matter files and ledgers selected by the accountant under rule 42 of the accounts rules.
In addition, it is suggested that any breach found during the course of the accountant's work should be noted in the accountant's report.
There is also the option of direct reporting to the Law Society under existing rule 38 of the accounts rules.
The accountancy profession will be included in the consultation.
25.
Generally speaking, a solicitor's work involves the conduct and completion of a transaction, or the provision of services forming part of the normal business of a solicitor's practice.
This distinction is made in paragraph (a) of the draft rule because it is important to cover solicitors who operate a client's own account (for example, as donee under a power of attorney) in order to help the client run his or her financial affairs.
It is an essential part of a solicitor's practice to be able to provide a service involving the transmission of money for clients who are unable to do so for themselves, albeit there is no underlying transaction.
Another example of a service forming part of the normal business of a solicitor's practice without any underlying transaction is the collection of rents for a landlord client.
26.
Paragraph (c) of the draft rule contemplates that a solicitor may act in exceptional circumstances where there is no underlying transaction or service forming part of the normal business of a solicitor's practice.
In that type of case, the solicitor will have to satisfy the intentionally stringent requirements set out in paragraph (c).
There is some concern that the existence of paragraph (c) might lead to problems of interpretation and so be open to abuse.
The exception is, however, suggested to make the rule more proportionate, so as not to stifle new initiatives which may in due course come to be regarded as part of the normal business of a solicitor's practice.
Views on whether the profession believe the exception is appropriate would be welcome.
27.
Some examples of circumstances which might be covered by paragraph (c) of the draft rule are given in draft note (v).
RRWP would welcome further examples.
For instance, it has been suggested that some solicitors are asked to hold money as stakeholders when they are not involved in the underlying transaction.
However, the High Court has warned that solicitors who facilitate transactions as stakeholders or otherwise must be vigilant and generally satisfy themselves as to the propriety of the entirety of the arrangements.
Such circumstances clearly give rise to concern, but should the rule allow the holding of money in these circumstances or not?
Money Laundering Regulations
28.
The Money Laundering Regulations are being revised, and by June 2003 will apply to most areas of solicitors' practice.
The regulations are part of the general law and failure to comply is a criminal offence.
While the Law Society (unlike the Financial Services Authority) is not a prosecuting authority in relation to the regulations, it is a 'supervisory authority' and this status is reflected in the Proceeds of Crime Act 2002.
29.
Practice Rule 13 (supervision and management) states:
'(1) The principals in a practice must ensure that their practice is supervised and managed so as to provide for:
(a) Compliance with principal solicitors' duties at law and in conduct to exercise proper supervision over their admitted and unadmitted staff.'
The Money Laundering Regulations place obligations on principals relating to the supervision and management of staff; that is, that there are internal reporting mechanisms and staff are adequately trained.
If a question arises about compliance with practice rule 13, the Law Society will expect principals to be able to produce evidence of a systematic and effective approach to compliance with the regulations.
These requirements will be clarified in future guidance to solicitors on money laundering.
30.
RRWP has included a specific reference to compliance with the Money Laundering Regulations in the draft 'Business Operations Rules' which were consulted on in January 2001.
It would welcome comments on whether the Society's approach to compliance with the Money Laundering Regulations is the right way for the Society to fulfil its regulatory responsibility and role as a supervisory authority.
The Law Society's standards board and compliance board are of the view that on balance a rule along the lines of the draft attached would be beneficial, subject to considering the views expressed in response to this consultation.
Annex
Solicitors' Accounts Rules 1998 - proposed new rule 18A and consequential changes to rules 38 and 42 and Appendix 3.
Rule 18A - Use of accounts where there is no underlying transaction
A solicitor must not pay, or agree to receive, money into any account connected with the solicitor's practice (client account, office account or an account in a client's own name operated by the solicitor) unless:
(a) the solicitor is in receipt of accompanying instructions which relate to an underlying transaction or the provision of services which may be regarded as forming part of the normal business of a solicitor's practice; or
(b) the money is office money paid in or received in the normal course of a solicitor's practice; or
(c) in exceptional circumstances, the solicitor:
(i) has satisfied him or herself as to the identity of the client; and
(ii) has checked and documented the source of the money; and
(iii) is satisfied as to the good intentions of the client and that there is nothing improper or illegal in receiving or holding the money.
Notes
(i) It is a criminal offence to assist in the process of disguising the proceeds of crime to make them appear legitimate.
It is also a criminal offence, in some circumstances, to fail to report money laundering activities, or to 'tip off' parties that a report has been made or that there is an
on-going investigation.
(ii) The act of paying or receiving money into an account, without the justification of accompanying instructions, may be used as evidence of money laundering or dishonesty either before a court or the Solicitors Disciplinary Tribunal.
(iii) Examples of office money falling within paragraph (b) would include tax or National Insurance rebates due to the practice, partners' capital contributions, partners' own transaction money and interest paid to the practice on the general client account.
Payments for billed costs in respect of work carried out would fall within paragraphs (a) and (b).
(iv) There would be no breach of this rule if money is sent to a solicitor's client account without the solicitor's authority.
The solicitor would, however, need to consider the position under the money laundering legislation and proceed accordingly.
(v) Examples of when a solicitor might hold money in an account without underlying instructions in accordance with paragraph (c) of the rule will be rare.
Examples might include cashing a cheque for a client without a bank account, or holding a windfall payment or lottery win on behalf of a client who wishes to keep the payment or win confidential.
In most cases, the requirement of paragraph (c)(i) of the rule to check the client's identity will in any event also be a requirement of the Money Laundering Regulations.
It is good practice to record the reasons for holding such money as evidence of compliance with paragraph (c) of the rule.
There is a danger of a solicitor losing the exemption under the Financial Services and Markets Act 2000 if a deposit is taken in circumstances which do not form part of a solicitor's practice.
(vi) A solicitor should consider carefully whether to act if he or she knows or suspects that either the client or a third party is being targeted by criminals and may lose money as a result.
(vii) The Law Society has issued a 'blue card' warning on money laundering and a 'yellow card' warning on banking instrument fraud.
It has also issued guidance on the money laundering legislation.
Solicitors should be aware that this guidance has been used in prosecutions of solicitors.
(viii) The Financial Action Task Force warns that solicitors and other professionals are increasingly, either knowingly or unknowingly, assisting money launderers.
Solicitors should not ignore signs of money laundering or other illegal activity, as they may be exposed to criminal proceedings with the risk of a lengthy custodial sentence.
They may also be liable as a constructive trustee or in negligence.
Solicitors' actions may be judged according to the standards of a reasonable solicitor.
(ix) The Solicitors Disciplinary Tribunal has made it clear that it is a serious error for a solicitor to pass money through a client account in the absence of an underlying transaction, or to agree to be instructed in a field in which the solicitor has insufficient expertise or access to the necessary expertise.
This is particularly relevant in the case of complex financial transactions.
(x) The Law Society has power to intervene in a practice where there is a failure to comply with practice rules or accounts rules, or where there is reason to suspect dishonesty on the part of a solicitor or employee (see paragraph 1(1)(a) and (c) of schedule 1 to the Solicitors Act 1974).
(xi) A solicitor is under a duty to report serious misconduct of other solicitors or the solicitor's own staff to the Office for the Supervision of Solicitors.
This duty may be affected by client confidentiality.
Confidential advice about whether a report should be made can be obtained from Professional Ethics.
(xii) Even if money is held or received in contravention of this rule, it must be dealt with in accordance with all other provisions of these rules.
Rule 38 - Reporting accountant's rights and duties - letter of engagement
Insert 'money laundering, or' in rule 38(1)(i) as follows:
(1) The solicitor must ensure that the reporting accountant's rights and duties are stated in a letter of engagement incorporating the following terms:
'In accordance with rule 38 of the Solicitors' Accounts Rules 1998, you are instructed as follows:
(i) that you may, and are encouraged to, report directly to the Law Society without prior reference to me/this firm/this company/this limited liability partnership should you, during the course of carrying out work in preparation of the accountant's report, discover evidence of money laundering, or theft or fraud affecting client money, controlled trust money, or money in a client's own account operated by a solicitor...
as signatory...;
Rule 42 - Test Procedures
In paragraph (1) insert a new paragraph (q) (renumbering accordingly) and a new note as follows:
(1) The accountant must examine the accounting records (including statements and passbooks), client and controlled trust matter files selected by the accountant as and when appropriate and other relevant documents of the solicitor, and make the following checks and tests:
...
(q) in relation to the client and controlled trust matter files and ledgers selected, check for compliance with rule 18A; and...
Notes
...
(iv) If, in the course of carrying out work in preparation of the accountant's report, the accountant finds any indication of a breach of rule 18A, he or she would be expected to make further investigations and include any breach of the rule in his or her report.
Any serious wrongdoing may be reported direct to the Law Society under the terms of the letter of engagement required by rule 38(1).
Appendix 3 - Law Society Guidelines - Accounting Procedures and Systems
Insert a new paragraph 3.5 as follows:
The firm should determine a policy and operate a system for identifying when money should not be paid or received into an account, or when the receipt or payment of money into an account necessitates additional checks, in compliance with rule 18A.
Questions
A full copy of the questionnaire is on the Law Society's Web site:
www.lawsociety.org.uk (go to View all Specialisms>Our Services> Rules Review: minimising the risk of money laundering - proposed amendments to the accounts rules).
We can also send you a copy, tel: 020 7242 1222 (ext.
3343 or 3613).
Replies should be sent to Carol Giles, Professional Ethics, The Law Society, Ipsley Court, Redditch, Worcestershire B98 OTD or DX 19114 Redditch or carol.giles@lawsociety.org.uk, to arrive by 1 July 2003.
When replying please indicate your name, address, type and size of practice.
Please also indicate whether you are responding on your own behalf or on behalf of your firm/organisation, and whether you want your response to be treated confidentially.
1.
Would you support the introduction of a new rule on the proper use of client account?
2.
Would you support the introduction of a new rule along the lines of the proposed draft?
3.
Examples of circumstances which might be covered by paragraph (c) of the draft rule are given in note (v) of the draft.
Please list any further examples you feel should be included (see paragraphs 26-27 of the consultation paper).
4.
Is the exception in paragraph (c) a necessary part of the rule, or should it be deleted to provide for a clearer but less flexible prohibition?
5.
Please give any examples of transactions or services which you think would be unjustifiably prohibited by the proposed new rule.
6.
Please give any examples of services which you consider form part of the normal business of a solicitor's practice, albeit there is no underlying transaction (see paragraph 25 of the consultation paper).
7.
Do you agree that the reporting accountant should make limited checks for compliance with the new rule? (See paragraph 24 of the consultation paper.)
8.
Do you think that the proposed new rule raises any human rights, or equality and diversity, issues which require further thought?
9.
Do you have any other comments?
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