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. 3.2. 3.3. 3.4. 3.5. 3.6. Lawyers Misgivings about the FATF recommendations. The right against self-incrimination. Lack of Requisite Mens Rea. Legal Fees. The Test for Suspicion, Subjective or Objective? The Costs of implementing the Recommendations.

4. The Need to include Lawyers. 4.1. 4.2. 4.3. 4.4. Compliance Begets Results. Changing Nature of Money. Fluidity of Money Laundering Schemes. 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 FATFs 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 Communiqu. 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.

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 th http://www.abanet.org/crimjust/taskforce/articles/gatekeepter2.pdf. Accessed on 16 September 2012.

Lawyers are among those singled out by FATFs 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

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.

Financial Action Task Force, RBA Guidance for Legal Professionals (2008), Available at th http://www.fatf-gafi.org/media/fatf/documents/reports/RBA%20Legal%20professions.pdf (accessed 18 September 2010)

2.1.

Ramifications of non-compliance

Although FATF regulations are soft law and do not impose laws on any nation, the group exerts international political pressure on its member states and other non-member states to enact its AML and CFT recommendations. FAFT has the blessing of the International Monetary Fund (IMF) and the UN Security Council, and powerful founder governments like the United States. Where a country does not comply with FATF recommendations, it risks being labelled high-risk and non-cooperative jurisdiction. The recompenses of compliance are that the country is viewed as a safe place to do business attracting foreign investments. In many domestic jurisdictions, which have implemented laws on Anti-money laundering, where a lawyer does not comply, he risks penal sanctions, as well as professional censure.

3. Advocate Client confidentiality and the right to Fair trial. Wigmore6 States that a lawyer has a paramount duty to keep his clients secrets. Communication between lawyer and client are privileged if they are confidential and for seeking legal advice to the client. In commonwealth countries, there are two types of privilege and only confidential communications falling under either two are protected by legal professional privilege. These are advice and litigation privilege. Advice litigation refers to confidential communications for the purpose of seeking legal advice while litigation privilege comes into play when litigation has started or there are prospects of litigation. The advocate client relationship is one of a fiduciary nature whereby the advocate on all matters within the scope of this relationship, owes his client the duties of good faith, trust,

J. Wigmore, Evidence in Trials at Common Law 1991 Para 2292, at Pg. 554.

confidence, and candour. This duty is enshrined in many constitutions.7 In an adversarial system, the accused person be afforded the same rights as the prosecution. It is the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may be afterwards disclosed and used against him.8 In R vs Derby Magistrates' Court ex parte B,9 Lord Taylor of Gosforth CJ said: 'The principle which runs through all these cases... is that a man must be able to consult his lawyer in confidence, since otherwise he might hold back half the truth. The client must be sure that what he tells his lawyer will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.' There are exceptions to the lawyer client privilege and these are: (a) the client has voluntarily waived confidentiality (b) a court ordered disclosure (c) the information is in the public domain (d) the information relates to the commission of a criminal or quasi-criminal offence.

For example Article 47 of the EU Charter of Fundamental Rights and Article 6 of the ECHR [European Convention on Human Rights]. 8 R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21 9 1996] AC 487 at page 507

Confidential communications between a client and his lawyer are not privileged if made for the purpose of a criminal enterprise and it is extraneous whether the crime is that of the client, the adviser or a third party acting through an innocent client.10 Wigmore was of the view that Lawyer-client privilege was a necessary evil which must be tightly restricted.11 3.1. Lawyers Misgivings about the FATF recommendations.

The main thorn of contention has been the suspicious reporting obligation and its effect on the right to fair trial. The right to in criminal cases entails: 3.2. right to communicate confidentially with ones lawyer right to a lawyer of ones choice the right not to incriminate oneself The right against self-incrimination.

Lawyers have argued that the reporting obligation violates the right against selfincrimination. The obligations amount to making a lawyer an informant for the government and entrapping his clients.12 This is not accurate because the SAR are reported by a third party(lawyer) the report exists independent if the will of the suspect therefore if does not violate the defendants own right not to incriminate himself.13

10 11

R v Central Criminal Court, ex. p. Francis & Francis [1989] AC 346, HL. Wigmore Para 2291, at 554. 12 Bester B. An 'assault' on the attorney-client relationship and the independence of the profession? De Rebus Available at http://www.derebus.org.za/nxt/gateway.dll?f=templates&fn=default.htm&vid=derebus:10.1048/enu accessed 20th September 2012. 13 See Saunders Vs. United Kingdom (1996) 23 EHRR 313.

3.3.

Lack of Requisite Mens Rea.

Lawyers have argued that the tipping off requirements create a criminal offence which does not require the requisite Mens Rea, intent or recklessness. The test for intention has been set out in many jurisdictions. It can be summed up in the question What did the accused intend, should have known or knew when he acted.14 3.4. Legal Fees.

Lawyers have complained that fees for legal services rendered may be from the proceeds of crime, which is liable to confiscation especially since CDD requires that lawyers be vigilant against cash payments. A lawyer may refuse to represent the defendant, which ultimately will result in a breach of right to fair trial. Most domestic laws have a specific exception to such an offence I the sum paid is for adequate consideration.15 3.5. The Test for Suspicion, Subjective or Objective?

Lawyers have complained that there is no standard set as to what amounts to suspicious behaviour.16 Furthermore, that the guidelines do not state what is sufficiently suspicious to warrant a SAR. This is a superfluous argument as the term suspicious has been defined by courts in several jurisdictions albeit not necessarily in the context of money laundering. In an American case, New Jersey v. T.L.O17, the Supreme Court described suspicion as the sort of common-sense conclusion about human behaviour upon which practical people . . . are entitled to rely. Further, it has defined reasonable suspicion as requiring only something

14 15

DPP v Smith (1961) AC 290. A. Leong The disruption of International Organised Crime an analysis of legal and non-legal strategies. Ashgate Publishers London 2007 Pg. 187. 16 A. Itzikowitz, (1998) "South Africa: Prevention and Control of Money Laundering", Journal of Money Laundering Control, Vol. 2 Iss: 1, pp.74 - 81 17 .469 U.S. 325, 346, 105 S.Ct. 733, 745, 83 L.Ed.2d 720, 737 (1985).

more than an unarticulated hunch. It involves facts or circumstances that give rise to more than imagination or hypothetical suspicion. In the South African case of Powell NO and Others v Van der Merwe and Others 18 the court held that suspicion is a subjective test. This argument underlines the need for CDD on clients because knowing your customer will minimise the need of being vigilant and suspicious. 3.6. The Costs of implementing the Recommendations.

Lawyers have argued that to comply with the recommendations, firms will need to train staff, maintain current records, and implement an effective methodology to identify customers and these rules apply whether they are a large firm or a sole practice. They say this could be costly. This is a fallacy because most jurisdictions law societies have continuous legal training for their members that is compulsory, and updates on compliance for money laundering issues should be part of the training. Ultimately, good practice against money laundering is an issue of ethics, which should be incorporated in law schools.

4. The Need to include Lawyers. Lawyers by the nature of their profession advice on and undertake a wide range of transactions on behalf of their clients. The services lawyers offer are critical for the criminals to launder their money. These services include: a) Advice. Criminals may seek advice on how to buy property with the proceeds of crime, how to open an offshore account, generally how to avoid leaving a money trail.19

18

1 All SA 149 (SCA)

b) Use of Law firms Clients account Clients accounts are used by lawyers to hold large sums of money pending the conclusion of a transaction. Since this money is held for short period for onward transmission to either a buyer or seller, or on the conclusion of a transaction, there is usually movement of money in and out of these accounts, which to a financial institution will not raise a red flag. This makes client accounts very attractive for criminals as a way of evading checks. c) Conveyancing. The purchase of real estate is a common way for criminals to layer, place or integrate the proceeds of crime into the economy. Lawyers can assist by masking the names of the criminal. d) Incorporation of companies and trust. In most jurisdictions, a legal firms endorsement is required for the creation of a Company or trust. By creating fake businesses, trusts and companies, lawyers can assist criminals to launder their money. e) Lawyer-client confidentiality. The fact that a lawyer cannot divulge what he discusses with his client hinders investigations into money laundering and this makes criminals comfortable dealing with lawyers to launder money. It is a wrong assumption that lawyers are more morally upright than other members off other professions are and should get special treatment. In the USA, a type of legal practice known as creative aggressive lawyering is highly encouraged. A lawyer is expected to do

19

See United States vs. Arditti 955 F. 2d. 331 (5 Circuit 1992), where the defence counsel was found guilty in a sting operation where he advised an undercover police officer on how to launder money.

th

whatever it takes to get what their client has asked, and spurred by contingency fees it means assisting your client launder money. 4.1. Compliance Begets Results.

In the United Kingdom, the coming into force of the Proceeds of Crime Act 2002, and the Money Laundering Regulations 2003, saw a sharp increase in the reporting of suspicious activities by solicitors. Before then, UK solicitors were responsible for only 1% moneylaundering reports made to the regulators and this had drawn criticism. 20 By 2011, reports from the Legal profession amount to the SAR reports account rose to encompass 25% of the 2011 SAR reports.21 This response to the money laundering legislation reveals that where lawyers themselves face criminal sanctions for non-compliance, they are willing to whistle blow on their client to save their own skin regardless of the monetary benefits. 4.2. Changing Nature of Money.

There has been a change in the nature of money through history. Gold was used as money, then paper and now virtual currency is gaining prevalence. This means many of the transactions are not face-to-face interactions. A good example is the use of QQ coins in china. These are virtual coins that took on real value, and used in real world trade prompting China to bans virtual cash for real-world trade.22

20

R E Bell, The Prosecution of Lawyers for Money Laundering Offences (2002) 6 Journal of Money Laundering Compliance p 17 at p 18 21 Serious Organised Crime Agency, Suspicious Activity Annual Report 2011 Available at http://www.soca.gov.uk/about-soca/library/doc_download/317-sars-annual-report-2011.pdf (Accessed 19th September 2012). 22 Demetis D. Technology and Anti-Money Laundering: A Systems Theory and Risk-Based Approach pg. 9

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 MOUs 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.

FIUs 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 1990s. 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 FIUs and investigators. All countries should require lawyers to apply a rules based approach to Money laundering.

23

The 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=AFQjCN th HgZ1dzSF0hNMkn733UGF42iS8nHQ&sig2=ao2nechAo400MwDzIoqHCg (Accessed 20 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 riskbased 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/395df898-65c3-4f57-99e0bcf791f482c0/Presentation/PublicationAttachment/584438aa-cd5e-47bc-a6c2-c0a544e7f61d/Gatekeeper.pdf. th (Accessed 10 September 2012).

General), 26that lawyers are exempt from federal money laundering laws, as the regulations would supersede solicitor-client privilege and thus violate the Constitution. 6. Terrorism, double standards, and the Risk-based approach. After 9/11 bombings in the USA, there was a push to have non-member countries implement anti-money laundering legislation. The UN counter-terrorism committee worked with FAFT to come up with additional recommendations.27 Coupled with pressure from the USA, developing countries were urged to put in place AML legislation with a component of anti-terrorism financing even where FAFT purports to lean towards risk-based approach. In Kenya, this stalled the passing of AML legislation in Kenya until the terrorism component was removed.28 There was a strong push for the Rule-based approach in developing countries while at the same time, the European countries and North American countries are allowed to monitor themselves. It is like saying the more industrialised countries lawyers are more ethical and moral than the less developed countries therefore cannot condone money laundering. This is double standard especially since the FATF recommendations are meant to be a common uniform criteria at the international level. Paolo Costanzo 29 argues, Domestic AML regimes have to be different to reflect countries' peculiarities, especially as regards the characteristics of the legal system and the overall risk profile.

26 27

2011 BCSC 1270 (CanLII). Briefing by Financial Action Task Force (FATF) to the United Nations Security Council Available at https://www.fic.gov.za/DownloadContent/NEWS/PRESSRELEASE/FATF%20Briefing%20to%20the%20United%2 th 0Nations%20Security%20Council%20Committee.pdf (Accessed 5 September 2012). 28 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-unbiasedreview-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 th Annually to Money Laundering, Tax Evasion 15 August 2012. http://www.ciponline.org/pressroom/article/regarding-walmex-gfi-research-shows-mexico-loses-50-bln-annually. See also Heather A. Lowe, th CNN, Illicit funds from Mexico find safe haven in U.S. 13 June 2012. Available at http://edition.cnn.com/2012/06/12/opinion/lowe-mexico-illicit-funds-u-s-/index.html (Accessed 28th September 2012)

FAFT needs to either return to a rules based approach or hybrid of both approaches. In the hybrid method, professions that are deemed to be high risk should have rules to regulate them. Gathii31 says that international Organisations like FAFT are increasingly becoming the platform for projecting western norms less visibly than if this were done through IMF or World Bank conditionality. This is especially true when it comes to the issue of regulating lawyers. There should be no differentiating between lawyers and other professions. Nor between lawyers in less developed countries and lawyers in developing countries. All countries and all professions should be subject to a rules-based approach or a hybrid of the two. Writing in the Guardian newspaper on the professional services offered to drug cartels to launder money, Ed Vulliamy says, The notion of any dichotomy between the global criminal economy and the "legal" one is fantasy. Worse, it is a lie. They are seamless, mutually interdependent, one and the same.32

31

J. Gathii The Financial Action Task Force and Global Administrative Law in Journal of The Professional Lawyer Pg. 197. Available at http://www.americanbar.org/content/dam/aba/migrated/cpr/pdfs/jpl10_09gathii.authcheckdam.pdf th (accessed 28 September 2012). 32 st Ed Vulliamy, Guardian UK, 21 July 2012. Available at http://www.guardian.co.uk/world/2012/jul/21/drugth cartels-banks-hsbc-money-laundering. (Accessed 19 September 2012)