AML crackdown needed on lawyers who enable kleptocrats

Russia: Lawyers enabling post-Soviet elites

An overhaul of anti-money laundering (AML) legislation – including targeting professional enablers like lawyers – is needed if the UK is to create a “hostile environment for the world’s kleptocrats”, a report by foreign policy think tank Chatham House has argued.

It said “capable and expensive lawyers (hired by members of transnational elites or their advisers)” defeated or deterred regulators’ “often weak and under-resourced attempts” to prosecute politically exposed persons (PEPs).

Failures of investigation and enforcement by the National Crime Agency (NCA) and other UK state bodies had led to “flawed judgments by UK courts”, particularly those involving post-Soviet elites.

The report went on: “This situation is materially and reputationally damaging for the UK’s rule of law and to the UK’s professed role as an opponent of international corruption. It demands a new approach by the UK government focused on creating a hostile environment for the world’s kleptocrats.

“An effective anti-kleptocracy drive would close legal loopholes, demand transparency from public institutions, deploy anti-corruption sanctions against post-Soviet elites and prosecute British professionals who enable money laundering by kleptocrats.”

The report, The UK’s kleptocracy problem – How servicing post-Soviet elites
weakens the rule of law,
 said that since the fall of the Soviet Union, the UK’s relations with Russia and Eurasian states like Azerbaijan and Kazakhstan had become “characterised in part by features of transnational kleptocracy, where British professional service providers enable post-Soviet elites to launder their money and reputations”.

The UK’s risk-based approach to AML had become “effectively risk-insensitive”, with banks over-reporting suspicious activity, “creating a deluge of reports for UK authorities to process”, while non-financial service providers often under-reported.

“Given the confidentiality that surrounds the SAR [suspicious activity report] system, it is impossible to determine whether legal professionals act appropriately on the red flags presented to them on any proposed transaction.

“However, it is likely that, along with a system overloaded with SARs, a lack of enforcement regarding failure to report a suspicion or knowledge of money laundering contributes to the sense of impunity within certain regulated sectors.”

The authors said the fact that “many top tier law firms and agencies” had been involved in cases featuring kleptocrats undermined the risk-based approach, “as it suggests they are not merely responding to a legitimate demand for legal services but generating that demand through their participation in a vibrant commercial market servicing the proceeds of kleptocracy.”

Large law firms could “outsource due diligence research” and offer clients “a range of future services – helping to obtain visas or citizenship, set up ‘tax-optimizing’ offshore structures, make charitable donations to bolster reputations and so on.

“Such companies will be aware when new AML legislation is introduced and what it means for their clients. Indeed, many legal firms will often advertise their services specifically in regard to new legislation.”

The report said “legal enablers of reputation laundering” had innovated to protect the privacy and public image of their clients.

“A recent trend to emerge after UK libel laws were made less punitive for defendants in 2013 has been for high net-worth individuals to use data protection and privacy laws to bring ‘quasi-defamation’ cases.”

The report concluded that, despite much “rhetoric and progress on paper” the UK remained “a safe haven for dirty money, a great deal of which comes from Russia and Eurasia”.

It recommended that an effective anti-kleptocracy strategy included mandatory reporting to a state agency of transactions by PEPs, and a widening of the disclosure requirements for PEPs who were beneficial owners of companies.

UK-registered companies could be required to have at least one UK citizen or resident as an officer, along with penalties for those who submitted fraudulent information to Companies House.

There should be a “clear mandate and better funding” for the NCA to investigate and prosecute enablers of money laundering, leading to a revival in the use of unexplained wealth orders.

Charities, including think tanks, should be legally obliged to publish a list of all significant donors, while universities should be obliged to report the identity of donors.

A Law Society spokeswoman said law firms allocated “substantial costs and resources” to complying with their AML and financial crime obligations.

She said that of over 573,000 SARs filed last year, over 75% were from banks and only around 1,500 from law firms.

“These numbers are proportionate for the number of transactions the legal sector undertakes compared to financial services and for how law firms operate.

“It is widely recognised by the UK government, law enforcement, the regulator and the UK’s National Risk Assessment that the vast majority of the sector is trying its best to do the right thing.

“However, the legal sector cannot be complacent or naïve and must remain vigilant against the ever-changing threat of illicit finance.”

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