The dirty money that is right under lawyers' noses

The dangers law firms face in becoming unwitting conduits for the profits of crime and asks, could they be more vigilant?

Is enough being done to prevent UK law firms being flooded with millions of pounds of stolen money, and are lawyers really a soft target for money launderers? The news that Britain was chosen as a safe haven for Nigeria's looted millions has inflamed an ongoing debate about the integrity of the banking system. How much of this will find its way into solicitors' client accounts?

Is enough being done to prevent UK law firms being flooded with millions of pounds of stolen money, and are lawyers really a soft target for money launderers? The news that Britain was chosen as a safe haven for Nigeria's looted millions has inflamed an ongoing debate about the integrity of the banking system. How much of this will find its way into solicitors' client accounts?

Criminals, like commercial businesses, aim to make a profit. Unlike genuine enterprises the origin of their earnings must be disguised. This is achieved by "laundering" through a cycle of transactions. This can involve willing or unwitting conduits such as solicitors and bureaux de change.

There are three main money laundering offences. Under the Criminal Justice Act 1988 and the Drug Trafficking Act 1994 it is an offence to assist someone to retain the proceeds of crime. It is also an offence to prejudice investigations by tipping off suspects. Yet prosecutions for money laundering are rare. According to a report by the Performance and Innovation Unit (PIU) of the Cabinet Office there were only 357 between 1987 and 1998.

In addition to the substantive law the financial sector is subject to extra regulation deriving from a 1991 European directive targeting drug barons. This led to the introduction of the Money Laundering Regulations 1993. It was hoped that these would encourage whistle-blowing about drug trafficking.

Affected organisations must take basic precautions such as getting to know customers and establishing anti-laundering systems. Charles Seligman, a manager in Brown Shipley's private banking department, says, "The most important thing is to know your clients." Bankers must be "comfortable with the source of the funds". The same can be said of solicitors. Information indicating "that any person has or may have been engaged in money laundering" must be reported to the authorities. In these circumstances suspicions can be passed on without fear of professional repercussions for breach of confidentiality.

The rules mainly cover financial institutions, although they also impinge on solicitors conducting investment business within the meaning of the Financial Services Act 1986 or offering investment or banking advice. The PIU observes that since "almost all the most complex laundering operations involve UK shell companies" regulation should apply to solicitors practising in the commercial field too.

The National Criminal Intelligence Service (NCIS) received 14,500 disclosures of suspicious transactions in 1999. Fleur Strong, an NCIS spokesperson, says, "In 1999 out of all the business transactions undertaken by law firms, lawyers only judged around 250 transactions as suspicious and disclosed them to NCIS as required by law." This is in spite of the fact that "overwhelming evidence exists for the continuing importance of the legal profession in facilitating complex money laundering obligations".

Are solicitors really ignoring crime? The Law Society gives warnings about laundering and it would be unusual for solicitors to overlook clear danger signs like clients remitting funds from abroad or acting via nominees for no good reason. In practice therefore the regulations are probably followed in spirit by the majority of firms.

The Cabinet Office has said that it wants new legislation to streamline laundering offences. The European Council has already proposed a second EU directive to combat "all serious offences". This would lead to an extension of record-keeping and identification procedures in current regulations to solicitors "participating in financial or corporate transactions, including providing tax advice".

The PIU has gone further in proposing a single money laundering offence covering the proceeds of all crime, and imposing an objective test for suspicion. Commenting on the possible effect of new regulations, Louise Delahunty, a partner at Peters & Peters, and chairwoman of the Law Society's Money Laundering and Serious Fraud Task Force highlighted two principal concerns. "Solicitors must have a clear understanding of when they will be deemed to be put on suspicion, and they must realise the impact this will have on their duty of confidentiality."