updated on 26 July 2005
QuestionWhat should lawyers know about money laundering?
Money laundering - the process of disguising the criminal origins of illegally obtained money - does not always take place in smoky back rooms by men in well tailored suits with briefcases handcuffed to their wrists. In reality, money laundering is a pervasive aspect of commercial life carried out by apparently respectable people.
Dirty money comes from a variety of crimes, ranging from drug trafficking to
white collar crime (eg, tax fraud). While the exact value of money laundered
through the United Kingdom cannot be measured, estimates of £25 billion
annually are not uncommon.
The Washing Machine Cycle
There are three stages to the money laundering cycle. First, the proceeds of crime will be placed into a legitimate institution like a bank, law firm or other professional institution. The more reputable the institution the better, because the attachment of a reputable name to the money helps to hide its origins. Next, the money will be used in a process of complex transactions. This could be anything from buying and selling shares or assets in a business to purchasing property. The transactions are layered on top of each other to disguise where the money first came from. Finally, the apparently clean money is used for a legitimate purpose. The dirty origins of the money are now invisible and it has been successfully integrated back into the mainstream.
Lawyers in the Wash
Commercial lawyers may be involved in all of the above stages. Dirty money can be placed into the laundry cycle by being paid into a firm's bank account. The layering process will almost certainly involve lawyers; most business and property transactions will require legal advice. Furthermore, a money launderer may produce bogus invoices and ask their lawyer to move dirty money around in settlement of them. Lawyers may also be involved in the final integration of the washed money by advising on transactions funded by apparently clean money.
Do Not Pass Go
In recent times UK and European legislators have reacted decisively to this problem. The Money Laundering Regulations 2003, together with the Proceeds of Crime Act 2002, place obligations on lawyers and other professionals to tackle the problem of money laundering directly.
As commercial lawyers we must now verify the identity of our clients, keep detailed records of procedures and, significantly, report anything suspicious to the authorities. This last point has proved contentious. Some feel that professional advisors are being asked to police the transactions on which they advise. A failure on behalf of an advisor to report suspicious activity can result in a prison sentence of up to five years. In 2002 a solicitor was jailed for six months for failing to report suspicious behaviour in relation to money laundering.
With the advent of these laws, money laundering has become a very serious issue for lawyers; the stakes are now so high that this is one element of commercial awareness we cannot afford to ignore.
William Yates is a trainee solicitor in Eversheds’ corporate services department.