By Rachel Rothwell


The UK's 'gold plated' implementation of European anti-money laundering legislation is 'diminishing the attractiveness' of UK law firms to sophisticated international clients, a European Commission study found last week.



The report comes as the Law Society and prominent City lawyers warned that Treasury regulations on money laundering published last month will harm the competitiveness of City firms because of a drafting blunder.



The commission's report, which assessed the impact of the second money laundering directive on the legal profession across Europe, also found that EU lawyers consider themselves under threat in Switzerland, the US and Canada, where the directive does not apply.



The commission said that while the directive had had no significant effect on the demand for services from lawyers as opposed to other professionals, it had increased 'lawyer to lawyer' competition, with practitioners from the UK at a disadvantage. It noted that UK lawyers made more than 10,000 money-laundering reports in 2005, while elsewhere in Europe, only Germany, Hungary and the Netherlands saw more than ten reports in any year from 2003 to 2005.



European lawyers are unconvinced by the usefulness and proportionality of the second directive, the report found. UK lawyers were also worried by the 'impossible moral situation' they faced when trying to carry on their relationship with clients without committing a tipping-off offence.



Robin Booth, chairman of the Law Society's money laundering task force, said: 'Sophisticated clients will know that doing business in the UK can be more troublesome than other jurisdictions. Where they have a choice, they may deliberately choose to operate through lawyers from other jurisdictions.'



Peter McNamee, legal adviser to the Council of Bars and Law Societies of Europe, said its members considered the second directive 'both unnecessary and a completely disproportionate response.'



Meanwhile, the Law Society has warned that the Treasury has failed to include a key element of the third directive in the draft regulations. Article 15 would allow UK firms to rely on identity checks carried out by a third party in another member state, even if they were based on different documents to those needed in the UK.



Law Society President Fiona Woolf said: 'The government's unnecessarily heavy handed approach... will result in unwarranted regulation and increased costs for solicitors.' Freshfields Bruckhaus Deringer partner Tim Cave added: 'We hold a very real concern that the draft regulations will not enable us to "passport" clients between our European offices where their document-gathering requirements differ'.



A Treasury spokesman insisted the regulations do allow UK firms to rely on third parties, even where the documents are different.



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