1. Introduction 2. The Scope of the Recommendations for Lawyers 2.1. Ramifications of non-compliance. 3. Advocate Client confidentiality and the right to Fair trial. 3.1. Lawyers Misgivings about the FATF recommendations. 3.2. The right against self-incrimination. 3.3. Lack of Requisite Mens Rea. 3.4. Legal Fees. 3.5. The Test for Suspicion, Subjective or Objective? 3.6. The Costs of implementing the Recommendations. 4. The Need to include Lawyers. 4.1. Compliance Begets Results. 4.2. Changing Nature of Money. 4.3. Fluidity of Money Laundering Schemes. 4.4. Efficiency and Effectiveness. 5. Rules based approach or Risk based approach. 6. Terrorism double standards and the Risk-based approach. 7. Conclusion.
Lawyers have expressed reservations that the AML obligations imposed on them violate confidentiality and the right to a fair trial. They argue that the impasse between the principle of professional privilege and the anti-money laundering (AML) obligations has reached the point where the second restricts the first. Proponents of the principle argue that the lawyer, because of this control, is bound to contravene international anti-money laundering regulation if he/she does not comply with reporting obligations; or breaks the professional privilege duty with the client, thereby leaving him/her liable to be sued by the client.
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1. Introduction
2. The Scope of the Recommendations for Lawyers
2.1. Ramifications of non-compliance.
3. Advocate Client confidentiality and the right to Fair trial.
3.1. Lawyers Misgivings about the FATF recommendations.
3.2. The right against self-incrimination.
3.3. Lack of Requisite Mens Rea.
3.4. Legal Fees.
3.5. The Test for Suspicion, Subjective or Objective?
3.6. The Costs of implementing the Recommendations.
4. The Need to include Lawyers.
4.1. Compliance Begets Results.
4.2. Changing Nature of Money.
4.3. Fluidity of Money Laundering Schemes.
4.4. Efficiency and Effectiveness.
5. Rules based approach or Risk based approach.
6. Terrorism double standards and the Risk-based approach.
7. Conclusion.
1. Introduction
The Financial Action Task Force (FATF) is an intergovernmental organization set up on the
initiative of the G7 in 1989 to fight money laundering and terrorism financing. The
membership currently stands at 36 countries and 2 regional organisations.1 FATF’s influence
is wider than its 38 members; more than 180 jurisdictions have endorsed its
recommendations. These include 8 FAFT associates members and 24 powerful organisations
such as the World Bank and United Nations. To achieve its mandate, FATF established 40,
plus 8 special recommendations. Most of these recommendations are directed towards
certain professions, which by virtue of the nature of their duties are in a position (knowingly
or unsuspectingly) to facilitate or deter money laundering and terrorism financing.2
10 years after the formation of FATF, G-8 ministers met in Moscow in 1999 and approved
the Moscow Communiqué. This report introduced the term “gatekeeper,” and gave birth to
the Gatekeeper Initiative.3
The Gatekeeper Initiative is a strategy by governments to enlist the support of certain
business and professional sectors to combat money laundering and terrorist financing.
Gatekeepers include lawyers, and other designated nonfinancial businesses and professions
(DNFBPs) who by virtue of their duties are in a position to be involved in transactions
dealing with the movement of money in domestic and international financial systems.
1 FATF website. Available at http://www.fatf-gafi.org/pages/aboutus/membersandobservers/ (Accessed 18th
September 2012.
2 FATF refers to lawyers and accountants as gatekeepers. FAFT Annual Report 2000-2001. Available at
http://www.fatf-gafi.org/dataoecd/29/36/34038090.pdf (Accessed 16th September 2012). 3 Zagaris B. The Gatekeeper Initiative: An Emerging Challenge for Professional Advisors of International
Business and Tax Matters (2002), available at http://www.abanet.org/crimjust/taskforce/articles/gatekeepter2.pdf. Accessed on 16
Lawyers are among those singled out by FATF’s recommendations. On February 16, 2012,
FATF revised its Recommendations and replaced the 40 Recommendations and 9 Special
Measures in place since 2001, condensing them to 40.
Recommendations 22 and 23 refers to lawyers as “designated nonfinancial businesses and
professions” or DNFBP. They are required, among other things, to maintain customer due
diligence, record keeping, and to report suspicious transactions. The 2012
Recommendations retained tipping off by lawyers to clients but only in some circumstances.
The record-keeping requirements are designed to make it easier for government officials to
investigate and prosecute violations. The Recommendations have not been popular with the
international legal fraternity, especially the suspicious transaction reporting (STR) obligation
and the “no-tipping off” policy, which prohibits lawyers who file suspicious transaction
reports from telling their clients they have done so.
2. The Scope of the Recommendations for Lawyers
The Recommendations apply to lawyers when they prepare for, or carry out transactions for
their clients in five areas of activity:
• buying and selling of real estate;
• managing of client money, securities or other assets;
• Management of bank, savings, or securities accounts;
• Organization of contributions for the creation, operation, or management of Companies; • The creation, operation, or management of legal persons or arrangements, and buying and selling of business entities.4
4 FATF recommendation 22(d).
The interpretive note to this recommendation clarifies that lawyers are not required to
report if the matter is covered by professional privilege, and this is extended to advice given
when dissuading a client against money laundering. The definition of what amounts to
professional privilege is left individual countries. Lawyers are also given leeway in reporting
STR to self-regulatory bodies, which in many countries is the law society. In 2008, FATF
published a guide for lawyers, containing risk-based guidelines about due diligence,
recordkeeping and the implementation of training and systems to deter and detect
AML/CFT activities.5
The 2008 Lawyer Guidance provides information about how lawyers might comply with the
FATF recommendations regarding the due diligence “know your client” requirements,
bookkeeping, training and advice on assessing client risk.
Lawyers have expressed reservations that the AML obligations imposed on them violate
confidentiality and the right to a fair trial. They argue that the impasse between the
principle of professional privilege and the anti-money laundering (AML) obligations has
reached the point where the second restricts the first. Proponents of the principle argue
that the lawyer, because of this control, is bound to contravene international anti-money
laundering regulation if he/she does not comply with reporting obligations; or breaks the
professional privilege duty with the client, thereby leaving him/her liable to be sued by the
client.
5 Financial Action Task Force, RBA Guidance for Legal Professionals (2008), Available at
Money laundering involves three distinct stages: the placement stage, the layering stage,
and the integration stage. In the cyber world, the first two stages may be online. Virtual
money does not need to be connected to a financial institution. However, criminals have a
need to be acknowledged by society and therefore flaunt the spoils of their success. The
integration phase of money laundering results in the illicit funds, now laundered, returning
to a state of consumable in the hands of the criminals that generated them. It is at this point
that the lawyers role as a gatekeeper is important because to legitimise their purchases, the
will need legal help. The lawyer is the connection between the cyber world and the real
world.
4.3. Fluidity of Money Laundering Schemes.
The RBA guidance presumes that criminals are not well informed about FAFT obligations on
DFNBs and banks. Money launderers are not guided or restricted by rules and obligations.
They do not need to sign MOU’s or set up Financial Intelligence Units (FIU). Nor spend hours
poring over voluminous data. They adapt to the circumstances, usually assisted by the very
lawyers the RBA guidance aims to target. They are rich and can afford to retain the best
lawyers in any jurisdiction. They come up with innovative methods of laundering money.
While money-laundering systems are evolving rapidly, the RBA guidance for lawyers has
been unchanged since 2008. To restrict the guidelines to a set of specific activities will
defeat the purpose. All Lawyers in all practices should be required to undertake CDD for all
clients and all transactions. The South African law has made Money Laundering for lawyers
an offence if the lawyer acts negligently or knowingly in proceeds of crime or does not
report the suspicion. Therefore, should a new method arise, the Lawyer can be held liable
whether he acted knowingly or negligently as long as the transactions concerns proceeds of
crime.
4.4. Efficiency and Effectiveness.
FIU’s operate by collecting data from different reporting institutions. The sheer number of
entities that are required to exercise vigilance against suspicious behaviour has expanded
tremendously since the 1990’s. In the USA, between 2003 and 2011, more than 5.3 million
SARs were filed by reporting more than 50,000 institutions.23 In the UK between 2010 and
2011 there were total of approximately 250,000 SARS filed by. With this volume of
reporting, it has become evident that many of the reports filed by financial institutions are
just “white noise”, meaningless information that is of little use to investigators and by
extension does not assist in the fight against money laundering. This costs financial
institutions and investigators time and money, and makes it more difficult for investigators
to focus in on the reports that are of the most relevance as the volume of the reports
obliterates important information. Money launders are using banking institutions less and
exploring institutions that are not part of the banking sector. Lawyers by the virtue that
legal work touches on almost every aspect of society and business are better placed to
monitor money-laundering transactions. It therefore makes sense that they should be
obligated to conform to the FATF recommendations. The focus against money laundering
reporting should be on the crime and the complicity of the legal and accounting professions.
Every lawyer should be compelled to report suspicious transaction activity on any
transaction and not only those set by the FATF. The SAR reports from lawyers should be
given prominence by FIU’s and investigators. All countries should require lawyers to apply a
rules based approach to Money laundering.
23The SAR Activity Review Trends Tips & Issues Issue 21 In Focus: Money Services Businesses
Published under the auspices of the BSA Advisory Group. May 2012 Available at https://www.fincen.gov%2Fwhatsnew%2Fpdf%2F20120509.pdf&ei=BANnUPjgJMa6hAfUlIGgBg&usg=AFQjCNHgZ1dzSF0hNMkn733UGF42iS8nHQ&sig2=ao2nechAo400MwDzIoqHCg (Accessed 20
th September 2012).
5. Rules based approach or Risk based approach.
Ultimately, the crux of the debate on lawyer-client confidentiality and money laundering is
the issue of regulation.
The "rule-based" and the "risk-based" are two approaches to the implementation of the
FATF recommendations. The FATF recommendations encourage countries to adopt a risk-
based approach to the fight against money laundering. This is a common sense approach
whereby lawyers voluntarily perform CDD and monitor their clients constantly. On the
converse is the rules-based approach, whereby lawyers are required to comply with
legislation, rules, or regulations at the risk of facing criminal sanctions. The Risk-based
approach allows lawyers discretion on what to report. Both approaches have been adopted
in countries' legislations.
The rule-based approach initiated the AML fight, but in 2000 to 2005, it was replaced by the
risk-based approach as it was found to be rigid and formal,24 leaving more discretion to the
lawyers.
The USA lawyers have been the biggest proponents of the risk based approach.25 Some law
societies have fought hard against the rules-based approach have managed to get legal
precedents that have declared such rules unconstitutional. After a ten year fight, the
Canadian Supreme court held in Federation of Law Societies of Canada v. Canada (Attorney
24 B. Hutter. Risk, Regulation, and Management, in Taylor-Gooby, Peter and
Zinn, Jens, (eds.) Risk in Social Science. (2006) Oxford University Press, Pg. 202-227. 25
See for example the articles by Kevin S. Shepherd who among other titles is a Former chair of the American Bar Association Section of Real Property, Trust, and Estate Law. The Gatekeeper Initiative and the Risk-Based Approach to Client Due Diligence: The Imperative for Voluntary Good Practices Guidance For U.S. Lawyers Available http://www.americanbar.org/content/dam/aba/migrated/cpr/pdfs/jpl10_04shepherd.authcheckdam.pdf and Guardians At The Gate: The Gatekeeper Initiative And The Risk-Based Approach For Transactional Lawyers http://www.venable.com/files/Publication/395df898-65c3-4f57-99e0-bcf791f482c0/Presentation/PublicationAttachment/584438aa-cd5e-47bc-a6c2-c0a544e7f61d/Gatekeeper.pdf. (Accessed 10
See Standard Newspaper Kenya “Only unbiased review will save Anti-terror Bill “Tuesday, September 25
2012 Available at http://www.standardmedia.co.ke/?articleID=2000066901&story_title=Only-unbiased-
review-will-save-Anti-terror-Bill. 29
P. Costanzo Money Laundering Conference, Utrecht School of Economics, Tackling Rule – Based Vs. Risk – Based Approaches To Control. The Third EU Anti – Money Laundering Directive. 3 November 2007. http://www2.econ.uu.nl/users/unger/papers/Costanzo.pdf.
This argument does not take into account the cross-border nature of money laundering nor
the fact that the cyber world, where there are no national jurisdictions, is a growing way to
launder money. Most of the money laundered from the less developed countries ends up in
the more industrialised countries. Mexico for examples loses US$ 50 million annually
through tax evasion, which ends up in the USA.30
The rules of regulation should be the same internationally. Lawyers are called gatekeepers
but it seems as if the lawyers in the less developed countries are the gatekeepers against
terrorism for the rest of the developed world.
7. Conclusion.
The lawyer-privilege confidentiality cannot be fully eroded by the FAFT inspired legislation,
as it only applies to money laundering situations. Once criminals know it is not safe to
launder through a lawyer, they will quickly seek other avenues.
While western countries deride the rule-based approach, the less developed countries are
pressured to adopt it. This creates a double standard. Less developed countries are
expected to be vigilant against terrorism AML financing because more often than not
terrorists come from less developing countries.
30 Center for International Policy Press Release, Regarding Walmex: GFI Research Shows Mexico Loses $50 Bln
Annually to Money Laundering, Tax Evasion 15th
August 2012. http://www.ciponline.org/press-room/article/regarding-walmex-gfi-research-shows-mexico-loses-50-bln-annually. See also Heather A. Lowe, CNN, Illicit funds from Mexico find safe haven in U.S. 13
th June 2012. Available at
http://edition.cnn.com/2012/06/12/opinion/lowe-mexico-illicit-funds-u-s-/index.html (Accessed 28th September 2012)