Sunday, May 13, 2012

Money Laundering in Jamaica (Part 3) - The Move towards Legal Professionals


In examining the move to pull lawyers - especially those who practise real estate law - under the AML regulatory net, I have underscored two broad areas which have been the focus of AML initiatives and which underpin the AML laws/regulations.

They encompass (i) identification of the client and (ii) reporting of large and suspicious transactions and fall under FATF recommendations 5, 6, 8-12 and 13-16 respectively. The Guidance for Legal Professionals makes it very clear that legal professionals include lawyers and notaries and cover legal professionals when they prepare for and carry out the activities outlined earlier in Part I ie.
  1. Buying and selling of real estate
  2. Managing clients' money, securities or other assets
  3. Managing bank, savings or securities accounts
  4. Organizing of contributions for the creation, operation or management of companies
  5. Creating, operating or managing  legal persons or arrangements and buying and selling of business entities
What is KYC

KYC is short for Know Your Customer or in the case of the legal profession Know Your Client. It is the foundation of a customer due diligence program which aims to avoid anonymity and ensure transparency by flushing out criminals and politically exposed persons (PEPs). So it entails establishing, verifying and keeping records of clients’and beneficial owners' identification and their business activities. When you go to the bank to open an account and you are required to provide identification, your address, your tax registration number and give references, you are being subjected to the bank's due diligence measures.

In some jurisdictions like the UK, Austria, Bahamas, KYC covered entities already comprise designated non-financial businesses and professions (DNFBP) like legal professionals. It is interesting to note that that is not the case in the United States pg. 16. According to the 2006 FATF Summary of the Third Mutual Evaluation Anti-Money Laundering and Combating the Financing of Terrorism.United States of America:
Accountants, lawyers, other legal professionals, real estate agents, and trust and company service providers (other than trust companies, which are subject to the same requirements as banks) are not currently subject to AML/CFT requirements (other than the large cash transaction reporting requirements).

It is worthy of note too, that the United States Permanent SubCommitte on Investigations in 2010 made the following recommendations after finding as a matter of fact inter alia that US attorneys facilitated the circumvention by a foreign client of anti-money laundering controls at US banks.
  • Attorney-Client and Law Office Accounts.Treasury should issue an AML rule requiring U.S. financial institutions to obtain a certification for each attorney-client and law office account that it will not be used to circumvent AML or PEP controls,  accept suspect funds involving PEPs, conceal PEP activity, or provide banking services for PEPs previously excluded from the bank; and requiring enhanced monitoring of such accounts to detect and report suspicious transactions.
  • Professional Guidelines. Professional organizations, including the American Bar Association, National Association of Realtors, ................. should issue guidance to their members prohibiting use of any financial account to accept suspect funds involving PEPs, conceal PEP activity, facilitate suspect transactions involving PEPs, or circumvent AML or PEP controls at U.S. financial institutions.Source Pg 6
Despite this and despite the FATF guidelines referred to in an earlier post, to date US lawyers remain unregulated in this regard. Like legal professionals in Jamaica, they are subject to the criminal laws and the standards of professional conduct which many argue are sufficient to capture the kind of illicit activity identified by the Subcommittee above.

It will be interesting to see in light of the clamp down on foreign corruption and the push against terrorist financing and money laundering by the United States (a major money laundering country) whether US legal professionals will ever be subjected to AML regulations. The American Bar Association has already spoken out strongly against any federal regulation saying it supports only voluntary risk based client due diligence. Will the Jamaica Bar Association adopt a different stance?

The thinking of course, in an environment where anonymity is frowned upon, is that if the legal practitioner is unable to verify the client's real identity he should not proceed to represent the client. So the lawyer who receives a call from the millionaire he's never met who resides in Guernsey and who wants to purchase real estate in the name of his grandson will have to get proof of the gentleman's identity and his grandson's identity and assess the transaction carefully if he is to proceed. If he cannot get verification he must forfeit those attractive fees.

What is STR

STR is where the legal profession will likely be up in arms or at the very least arguing before the court about confidentiality or legal professional privilege as STR involves reporting suspicion of money laundering activity by clients if there is reasonable grounds to suspect the funds are proceeds of criminal activity. According to FATF, lawyers should effect both customer due diligence and reporting of suspicious transactions when they carry out the activities specified and identified in Money Laundering Part 2 below.

The FATF is mindful of this challenge and has quite reasonably recommended under recommendation no. 16 that:

Lawyers, notaries, other independent legal professionals, and accountants acting as independent legal professionals, are not required to report their suspicions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.”

However the boundaries of legal professional privilege while addressed in several decisions in common law, are not always clear and given how jealously guarded the client's privilege is among legal professionals, it will depend on the legal requirements of the particular jurisdiction. Attorneys who engage in certain activities in the UK, EU member countries, Hong Kong, New Zealand and others are subject to reporting requirement. Of course lawyers who handle real estate transactions are not exempt.

It is not surprising however that some jurisdictions have excluded lawyers from the list of professionals who must report their suspicions. Lawyers who however participate in activities on behalf of their clients which enable the laundering of ill-gotten funds might find themselves being subject to investigation for committing a money laundering offence whether or not they are obligated to report their suspicions.

It will be interesting to observe the approach taken by the Jamaican authorities to this aspect of their initiative to bring lawyers directly under the scope of money laundering regulations.  If they are exempt from the suspicious reporting requirement it will be all the more remarkable given the fact that they often seek to emulate the UK legislation. Perhaps they will be more inclined to approximate the United States position where the attorney/client relationship is sacrosanct.