By Ron Pol*
Much has been written about lawyers and money laundering. Some of it alarming, some apprehensive, and some plain wrong. But, as Gary Hughes observed (LawTalk 908, pages 36-41), for most lawyers, anti-money laundering is manageable.
Gary offered five steps that firms can take now. This article shares five myths that lawyers should avoid. Falling into any of these traps can make it harder – and more expensive – than it needs to be.
Grounded in practice, these are some of the commonest misunderstandings that lawyers have shared with me over the past five years. My conversations with firms invariably follow the same path:
“There’s no evidence. If it happens in our profession, it’s just a few bad apples. It couldn’t happen in our firm. I haven’t seen it in my practice”.
After I outline some of the ways that Kiwi lawyers were used to launder criminal proceeds over the past 20 years, someone inevitably says “I remember a case where...”. The floodgates open.
Lawyers have a tremendous capacity for remembering past transactions, including ‘odd’ things that, at the time, were difficult to pin down. With new knowledge, red flags suggesting possible misuse of lawyers’ services and trust accounts reappear in sharp focus.
Dispelling persistent myths with real-life examples from a firm’s own practice along with empirical evidence of how it occurs in practice in New Zealand can help identify, and avoid, similar issues in future.
It can also be easier, cheaper, and more effective than training exercises with theoretical examples and overseas case studies infused with the arcane terminology of an industry known for its “official narrative” driving what one expert recently termed “policy-based evidence making”.
This article is firmly evidence-based. It draws from years of PhD research, including the only empirical evidence of its kind identifying- tifying exactly how New Zealand lawyers were used to launder the proceeds of serious crime, often unwittingly.
There's no evidence that lawyers are involved
This idea is usually based on the paucity of prosecutions, with just one well known case of a lawyer prosecuted, many years ago, ‘only’ for failing to report suspicions. There are at least three problems with this myth.
Paucity of prosecutions not all it seems
Less well-known, there have been at least four prosecutions of legal and accounting professionals, with one jailed for laundering. There are also other cases in the civil jurisdiction where lawyers facilitated transactions with criminal funds. And practitioners today in the same position as the two lawyers prosecuted more than a decade ago would nowadays likely face criminal money laundering charges. Prosecutors no longer need to prove knowledge that funds came from a specific offence or type of offence; reckless disregard as to the source of funds is sufficient.
Nonetheless, a few cases, many years ago, isn’t enough to dislodge the myth.
Enforcement gap, not evidence gap
A lack of prosecutions doesn’t mean a lack of evidence. I located the contract documents themselves, in proven criminal proceeds transactions facilitated by professionals (lawyers, accountants and real estate agents) going back more than 20 years. In a tightly defined research range, in just one part of one practice area, the number of identified professionals facilitating criminal transactions quickly got into hundreds. (The research cases were anonymised). As well as criminal real estate transactions facilitated by lawyers, professionals were found to have established trusts with criminal assets, acted as trustees over criminal funds, incorporated companies used as consignees for methamphetamine shipments, registered and purchased high value assets with criminal funds, acted as conduits for crime funding, locally and over- seas, and facilitated laundering transactions by many methods, apparently even including litigation in New Zealand courts.
Moreover, the research cases comprise only a small fraction of the $1.35 billion that police say is laundered each year, plus at least as much again in tax evasion, and more again with overseas criminal funds laundered locally. When drug dealers, corrupt overseas officials, tax evaders and others buy and sell real estate with the proceeds of criminal endeavours, they invariably use New Zealand lawyers. Other financial transactions also require, or benefit from, legal expertise.
As a result, the research cases involving lawyers found to have facilitated transactions with proven criminal proceeds are, logically, the tip of an iceberg of indeterminate proportions. All such transactions when criminals choose to use lawyers, and all transactions that must be conducted with legal expertise, necessarily involve lawyers.
Nonetheless, police might continue a traditional focus mostly on local drug dealers, preferring an ‘education’ path for the professions – in which case this myth might have little practical impact on law firms.
Overseas crime-disruption trends, however, increasingly focus directly on professional services firms facilitating criminal transactions, including those unwitting or wilfully blind to the source of funds.
If contemporary policing methods take hold here, and perhaps in any event, law firm leaders might wish to consider the benefits of dispelling any lingering perceptions that there’s no evidence that lawyers were used to help launder proceeds of crime.
The evidence exists. It’s just that some cases haven’t been prosecuted or investigated and in many cases it may be difficult, perhaps impossible, to isolate criminal transactions amongst countless legitimate deals.
We’ll keep an eye out for cash
This myth is understandable. Retail drug dealers operate in cash and some of the dumbest criminals still occasion- ally try to use large amounts of cash in real estate and other transactions. Counter intuitively, there are some indications that sophisticated criminals sometimes con- vert assets (back) into cash, to break the record chain or ‘prove’ the legitimacy of large cash sums. Cash therefore remains a relevant indicator and it appears in standard lists of generic red flags.
A benefit of empirical research, however, is the new- found ability to identify and rank the most common red flags, specifically relevant to New Zealand transactions facilitated by professionals.
The research supports earlier police findings. Criminal transactions using law firms increasingly – and mostly – involve electronic payments.
Moreover, fraud, tax evasion, overseas corruption, and many other sources of criminal funds typically originate electronically. Firms on the lookout mostly for cash therefore risk leaving their trust account open to the main source of criminal funds: ‘from the bank’.
But if it’s from the bank, it’s OK
Partly addressed above, this perception is so strong it’s usually expressed separately. It sounds plausible. If money enters the trust account electronically from a
local bank, it passed through stringent money laundering checks. It ‘must’ be clean.
With longer experience of the realities of money laundering, however, some overseas authorities frankly accept that, amidst millions of legitimate transactions, banks sometimes have only fleeting visibility of criminal funds.
New Zealand’s evidence base holds similar insights. It’s sometimes remarkable that banks identify criminal activity involving only a few transactions, completed in milliseconds. However, often involved with structuring and implementing financial transactions, the research revealed many cases where lawyers had many more interactions with criminal actors over a longer period than banks.
The research also found that banks and lawyers often see different red flag indicators of criminal activity. Red flags visible to lawyers are not always seen by banks, and vice versa. It also exposed many instances where criminals compartmentalised knowledge between banks and lawyers, helping mask their activities from both.
The evidence uncovered cases where, having duped a law firm once, those responsible for directing criminal funds targeted the same firm in future transactions. In at least one case, a firm successfully used by one criminal group was later used by another, seemingly unrelated, criminal network to launder proceeds of serious crime into real estate in Auckland and the Coromandel.
In short, banks sometimes miss, or may not be exposed to, the same red flags as lawyers. This means that firms operating on the assumption that funds ‘from the bank’ are inherently ‘clean’ risk becoming an easy conduit for money laundering.
Risk assessment and software will fix the problem
A risk assessment is compulsory and software will be useful for many firms. However, relying on them is no substitute for people, knowledge and culture.
In revealing how criminal groups use lawyers to launder money, the research showed the vital importance of old-fashioned common sense by lawyers and staff who understand the various ways, in very practical terms, how their services and trust accounts can be misused.
The new legislation has many gaps so software, manuals and training calibrated for ‘compliance’ inevitably leaves avenues open for criminals to continue using law firms to launder criminal proceeds.
‘Tone from the top’, knowledge, common sense and culture remain the most effective, and often cheapest, ways to reduce and prevent criminal misuse of law firms.
The new laws are based on solid evidence
This myth does not suggest that lawyers aren’t used by criminals to launder the proceeds of serious crime. They are. It is just that the new laws were not fully evidence-based, so there are necessarily gaps between the provisions and the reality of financial transactions facilitated by lawyers.
New Zealand Police conducted an evidence-based scoping exercise a few years ago. Surprisingly, despite millions of dollars on policy advice over more than two decades, no New Zealand government appears to have commissioned extensive empirical research to learn exactly how laundering occurs in New Zealand and to combat it based on facts, beyond conjecture, assumption and rhetoric.
There are some indications that New Zealand’s regulatory and enforcement agencies might advance evidence-based practices. The policy-making process for extending money laundering controls to lawyers, however, might someday make an interesting university case study. The trail of policy papers and analyses contain enough unsupported assumptions, circular arguments and obvious gaps, cloaked in apparent obscurantism, to fill many research papers.
However, in practical terms this myth might not matter as much as the others. Whether it’s well grounded in evidence, or not, the law is what it is, and lawyers will need to comply with it.
The issue for law firms then is not legal, or compliance, but strategic. Some firms might want to make it harder for their practices to be used to perpetuate serious criminal enterprises. If they believe that the new laws comprehensively prevent criminal misuse of legal practices, they might miss the gaps.
That is because the research illustrates what police have long known. Criminals adapt quickly, and with obvious legislative gaps, ‘displacement effects’ are inevitable. When one channel closes, criminals use others.
Paradoxically it should be possible to better protect law firms – at no more cost – than a narrow focus only on ‘compliance’ with (arguably) flawed laws.
For most law firms, anti-money laundering is manageable. Avoiding some of the myths can make the process easier and more effective, and help keep costs down.
*Former lawyer Dr Ron Pol (firstname.lastname@example.org) is a legal management consultant and principal at AMLassurance.com. His PhD thesis was supervised by Professor Jason Sharman and is entitled “Effective sentinels or unwitting money launderers? The policy effectiveness of combating illicit financial flows through professional facilitators (lawyers, accountants and real estate agents)”.
This article first appeared in the NZ Law Society's LawTalk here and is used with permission.