Money laundering:
Call for overhaul of regime
Dozens of UK law firms are – wittingly or unwittingly – providing corrupt individuals with services that enable them to “move, hide and defend their ill-gotten gains with impunity”, Transparency International (TI) has claimed.
The global organisation called for a “fundamental overhaul” of the anti-money laundering (AML) regime, identifying as a major problem regulatory bodies that have a role as AML supervisors that are also connected to their representative bodies.
Its new report, At Your Service, seeks to shine a light on the role played by UK services in corruption and shows how, as well as financial institutions and law firms, the likes of schools, universities, architecture and interior design firms, and luxury goods and services businesses also – unwittingly or otherwise – support corrupt individuals.
TI collected and analysed over 400 cases of high-level corruption and associated money laundering over the last 30 years covering 116 countries of origin, and identified 582 firms and individuals offering services in the UK, including 81 law firms.
It took a close look at 293 property transactions, worth more than £4.4bn, involving suspicious wealth relating to politically exposed persons from high-corruption-risk jurisdictions, or those charged with, convicted of or alleged to have committed corruption offences.
“We identified 56 law firms involved in 132 of these transactions, which were worth more than £3.2bn. These firms either offered conveyancing services to the buyer or were responsible for forming and maintaining the entity used to make the purchase.
“They varied in size from major international businesses to those employing fewer than 10 members of staff. It is unclear whether any submitted SARs [suspicious activity reports] in response to the activity they carried out for the buyers.
“Using Land Registry data on property that offshore companies currently own, we found that these 56 law firms have been involved in at least 4,200 further transactions involving secretive corporate vehicles, which are a common feature of high-end money laundering.”
TI suggested that what it saw as a low level of enforcement action taken by the Solicitors Regulation Authority did not “appear proportionate related to the likely levels of non-compliance with the MLRs [Money Laundering Regulations] within these firms given the number of properties we have found bought with suspicious funds”.
Some 32 law firms were also found to be involved in ‘Laundromats’ – a series of immense corruption schemes uncovered by the Organised Crime and Corruption Reporting Project.
“Many of these are globally renowned firms with offices around the world. These payments came from shell companies with accounts at Baltic banks that have now been closed. These very same mechanisms have been used in the past to launder money,” the report said.
“It is unclear from the transaction data what services these UK firms supplied. Many of the payment references indicate trade misinvoicing, with payment purposes bearing no relation to the services the beneficiary firms normally provide.”
TI said corrupt individuals were able to use law firms’ services “to defend themselves and their commercial interests, and to cleanse their reputations” as well, with the Financial Action Task Force naming litigation as one way in which criminals may seek to abuse the legal system.
“UK courts have ruled sham litigation, involving fabricated disputes to make a transfer of funds appear legitimate, to be a form of money laundering. Lawyers must ensure the case brought to them is genuine and not an attempt to move criminal funds.”
The report also called out a “serious and worrying pattern” of UK law firms issuing ‘cease and desist’ letters to journalists and non-governmental organisations seeking to expose potential corruption, even if the stories or journalists have no presence in the UK.
“Those providing these services will be required to abide by the MLRs, but may not view this type of activity as a high money laundering risk.”
Among TI’s recommendations were that businesses should apply ethical principles to guide their engagement with high-risk customers. “For example, if a law firm wants to take on a client accused of grand corruption on an ‘access to justice’ basis, it could decide only to do so at legal aid rates.”
The report concluded that the businesses and individuals involved lay “across a spectrum of involvement – from the unwitting to the unscrupulous”.
It added: “We also recognise that there that a large proportion of businesses and professionals are extremely dedicated to doing their bit to help tackle corruption abroad and any proceeds of such activity that ends up here in the UK.”
But it argued that the UK’s system for overseeing compliance with AML laws was inadequate, with multiple AML supervisors, some of which act as both regulators and trade bodies for their industry.
“Furthermore, where wrongdoing is found, enforcement through both civil and criminal sanctions is low, leading to a lack of effective deterrent against cavalier AML practice. This then drives low compliance with regulations, which in turn diminishes the number of actionable reports available to the police.
“This system requires a fundamental overhaul if the UK is to stand any chance of ensuring its private sector provide an effective frontline defence against dirty money.”
But what exactly are Law firms doing or not doing? Supposing CDD or EDD checks out. Supposing there are no “reasonable grounds” for suspicion. Supposing a matter is reported and no refusal is received in 7 days? How far do we realistically need to go in checking source of funds if there are no suspicious circumstances? and if firms are breaching the regulations why are they not prosecuted and shut down with learning points circulated to the profession? Maybe government should introduce better proofs of identity and better means of certifying it.