On 15 February 2012, FATF (2012) issued revised standards on combating ML/TF and the proliferation of weapons of mass destruction. FATF stated that the revisions to the FATF recommendations addressed new and emerging threats, clarified and strengthened many of the existing obligations, while maintaining the necessary stability and rigour in the recommendations. Key changes of interest to the legal profession include:
- increased clarity in the risk-based approach including guidance on the types of clients, countries and transactions that may be higher or lower risk;
- the ability to provide options for simplified due diligence and also complete exemptions from due diligence requirements;
- for due diligence on trusts, the protector and settlor are now required to be identified;
- the standards now require a company register to be established in each country, which should at least have information on shareholders or members, directors and basic regulating powers; and
- trustees are required to hold information on beneficial owners and provide information on beneficial ownership to regulated entities, although this requirement may be applied by common law and foreign politically exposed persons should be subject to enhanced due diligence whether they are the client or the beneficial owner and enhanced due diligence should apply to domestic politically exposed persons (PEPs) on a risk-based approach.
FATF’s Recommendations concerning DNFBPs state that countries should extend the CDD and record keeping requirements established for financial institutions to casinos, dealers in precious metals and stones, real estate agents, trust and company service providers, and accountants and legal practitioners when they engage in specified financial or real estate transactions (FATF 2012: rec. 22 & 23). FATF and FATF-style regional bodies, evaluate their members’ implementation of the Recommendations including the extent to which member countries enforce the requirements put into legislation and enforceable instruments. FATF publishes the results of the mutual evaluation processes and between 2000 and 2006, maintained a list of non-compliant countries and territories it considered to have substantial gaps in implementing the Recommendations. FATF revised its review process for non-compliant jurisdictions in 2007 and published a list of jurisdictions with strategic implementation deficiencies in 2010, along with recommendations for other nations to adopt specific methods to protect their financial systems from the potential risks associated with non-compliant countries (FATF 2010).
It is within this context of mutual evaluation that many jurisdictions have engaged in substantial debate over the application of AML/CTF regimes to the professions. The result of this debate has been the adoption of a variety of approaches. This section considers the experiences of a number of countries in seeking to extend their AML/CTF regime to DNFBPs. In Japan, for example, the Act on the Prevention of Transfer of Criminal Proceeds (Law No 22 of 2007) regulates ‘specified business operators’ that include lawyers. Article 8 of the Act delegates authority to the Japanese Federation of Bar Associations (JFBA) to make rules applicable to lawyers. This means that a limited industry self-regulation model applies under which the JFBA has implemented rules for the verification of client’s identity and record keeping. These rules are designed to address AML/CTF concerns. There is currently no suspicious matter reporting requirement on Japanese lawyers, following vigorous opposition by legal practitioners and the JFBA.
Legal practitioners in a number of countries have expressed concern that implementing AML/CTF requirements for the legal profession would have a damaging effect on the practitioner/client relationship and impinge on the ability of practitioners to provide a fully informed service to their client. The obligation to submit suspect transaction reports has been one aspect of AML/CTF regulation that has caused considerable concern for legal practitioners in Australia and elsewhere (LCA 2007). The basis of this concern is that it is a central tenet of the rule of the law that people should be able to obtain independent and skilled advice about the application of the law to both themselves and their affairs. This necessarily requires that a person be free to communicate fully and frankly with their legal adviser and that, in turn, requires a guarantee of confidentiality. For this reason, legal practitioners have a professional obligation to keep the affairs of their clients confidential and to ensure that members of their staff do likewise. This duty of confidentiality extends to all matters divulged to a solicitor by a client, on his or her behalf, from whatever source and is reflected in professional conduct rules (and in the common law governing fiduciary relationships).
Professional conduct rules provide for exceptions to this overarching duty. Importantly, this includes where the practitioner discloses the information for the purpose of avoiding the probable commission of a serious criminal offence. The legal profession’s primary concern with the imposition of a suspicious matter reporting obligation on legal practitioners is that it could undermine the relationship of trust and confidence between legal practitioner and client. In the view of the profession, these concerns cannot be addressed simply by the insertion of a provision that preserves legal professional privilege (LPP). This is because the breadth of information and material that is protected from disclosure by LPP is significantly narrower than that encompassed by client confidentiality. If a suspicious matter reporting obligation is applied to practitioners, clients are likely to refrain from providing non-privileged material to legal advisers, even though this material may be crucial to the formulation of accurate and complete legal advice. Importantly, this includes clients who may wish to avoid public disclosure of their material for reasons that are entirely legitimate, such as for personal or legitimate business reasons. Other reservations expressed by professionals facing inclusion in the AML/CTF regime have included fears of unwittingly committing a criminal offence while carrying out professional responsibilities (He 2006).
Finally, it is arguable that prosecution and disciplinary action for the same conduct could raise questions of double jeopardy. While British law finds no grounds to apply double jeopardy law in these circumstances, there is the potential for it to be used in countries that have ratified the European Convention on Human Rights. In deciding whether an individual is facing criminal proceedings, the Convention focuses on the body of the legal processes as opposed to the structure. A defendant who is facing disciplinary action in these jurisdictions could argue that the proceedings constitute criminal proceedings and that parallel investigations would lead to a process of double jeopardy (Middleton 2005).
The following discussion focuses on a sample of countries only namely, the United States, Canada, the United Kingdom, selected European countries (Belgium, France, Germany and Switzerland) and selected Asian countries (The Republic of China, Hong Kong SAR, Singapore and the Republic of China, Taiwan). These were chosen to be illustrative of the range of regulatory models that exist in developed nations. Limitations in the availability of information in English prevented full descriptions of these countries’ systems in all cases.
The Annunzio-Wylie Anti-Money Laundering Act 1992 (US) permitted the Secretary of the Treasury to require any financial institution to file a report of a suspicious transaction. The AML/CTF legislation in the United States includes the Currency and Foreign Transactions Reporting Act (US) (known as the Bank Secrecy Act (BSA)), the Money Laundering Control Act 1986 (US) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (US) (the PATRIOT Act).
The BSA is the central legislation for the AML/CTF regulatory system in the United States. The PATRIOT Act amended the BSA in 2001 and substantially increased the regulatory requirements intended to prevent and detect money laundering in the United States. The PATRIOT Act, in addition to expanding the regulatory regime, also increased the penalties for money laundering offences.
The BSA defines financial institutions in the United States and this now includes depository institutions, securities broker-dealers, mutual funds, money service businesses and futures intermediaries. The BSA now also covers travel agencies, jewellery dealers, insurance companies, finance companies, unregistered investment companies and persons involved in real estate settlements and closings but these institutions are not necessarily subject to the same level of regulation.
Some AML/CTF provisions extend to all businesses and to all individuals. The Annunzio-Wylie Anti-Money Laundering Act 1992 (US) requires all businesses to keep customer identification records for all currency transactions between US$3,000 and US$10,000. Section 31 USC 5331 requires all individuals involved in trade or business (except financial institutions, which are covered by the BSA) to report currency received for goods in excess of US$10,000 to the Financial Crimes Enforcement Network (FinCEN), the financial intelligence unit in the United States.
Legal practitioners are not defined as financial institutions under the BSA and are therefore not subject to most of the BSA’s requirements. The American Bar Association has expressed concern regarding the potential impact of AML/CTF obligations on legal practitioners’ ethical requirements and LPP (FATF 2005a), preferring instead its Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing (ABA 2010). The American Bar Association President stated in 2011 that:
in our view, the Voluntary Guidance is the most effective means of both combating money laundering and avoiding the passage of federal legislation or adoption of rules that would impose unnecessary, costly, and burdensome new regulations on lawyers and the legal profession and adversely affect the clients that we serve (Zack 2011: 1).
FinCEN is reviewing the question of the application of AML requirements to legal practitioners, particularly with regard to real estate transaction and corporate formation capacities. Since 2009, a number of bills have been introduced into Congress that would bring legal practitioners within the remit of the BSA. At the time of writing, the Treasury Department and key senators on the Senate Homeland Security and Governmental Affairs Committee are working on alternatives to previous bills with the intent of reintroducing similar measures early in the 112th Congress (see ABA 2012).
Accountants in the United States are not defined as ‘financial institutions’ under the BSA and are therefore not subject to most of the AML requirements under this Act (FATF 2006).
Dealers in precious metals and stones
BSA defines dealers in precious metals and stones as financial institutions but these businesses have not yet attracted any industry specific regulation from FinCEN. In June 2005, FinCEN released an interim ruling requiring dealers in precious metals, stones, or jewels to establish an anti-money laundering program. This rule applies to dealers who sold at least $50,000 worth of ‘covered’ goods in the preceding year. Covered goods include jewellery, numismatic items and antiques. This sale limit was included to ensure the requirement did not affect small businesses or hobbyists (FinCEN 2005).
Real estate agents
Real estate agents were included in the definition of financial institutions and theoretically subject to AML/CTF requirements, although FinCEN has not yet issued specific rules for businesses involved in the settlement of real estate transactions. The practical implication of this is that real estate agents are not specifically subject to AML/CTF regulation.
Trust and company service providers
Companies acting as an agent in the formation and administration of companies are not subject to the requirements of the BSA and therefore are not subject to AML/CTF requirements (FATF 2005b).
Characteristics of designated non-financial businesses and professions
Reflecting the absence of AML/CTF regulation for legal practitioners and accounting professionals, the bulk of businesses with AML/CTF obligations in the United States are money service businesses. DNFBPs constitute 6.9 percent of the total regulated sector only, as the data in Table 14 indicate. Most of the non-financial businesses are dealers in precious metals and stones. These businesses comprise 20,000 of the businesses shown as non-financial businesses in Table 14 (FATF 2006). The remaining DNFBPs in this figure are casinos and card clubs.
The estimate of the number of dealers in precious metals and stones in the United States is derived from FinCEN estimates of businesses with AML/CTF requirements. The sector consists of businesses ranging from sole traders to listed public companies.
The United States Economic Census 2002 (USCB 2002) counted 76,341 real estate agents (offices of real estate agents and brokers, excluding lessors and activities associated with real estate) in the United States, with at least one employee in 2002 and 646,290 businesses with no employees (predominantly self-employed individuals with unincorporated businesses).
Money laundering is criminalised in the United Kingdom by the Proceeds of Crime Act 2002 (UK) (POCA 2002 UK), as amended by the Serious Organised Crime and Police Act 2005 (UK). The United Kingdom also regulates money laundering through the Money Laundering Regulations (UK). The 2003 regulations were recently amended in favour of the Money Laundering Regulations 2007 (UK), which were created to implement the European Union’s Third Money Laundering Directive (Law Society (United Kingdom) 2008). These regulations took effect in December 2007.
The Money Laundering Regulations 2007 (UK) expanded the DNFPBs included in the AML/CTF regime in the United Kingdom. The 2007 provisions included auditors, accountants and tax advisors, independent lawyers, trust and company service providers, real estate agents, high-value dealers (including dealers in precious metals and stones) and casinos in the AML/CTF regime.
On 1 October 2012, the Money Laundering (Amendment) Regulations 2012 came into force following a review of the 2007 Regulations carried out by HM Treasury. The principal amendments to the Regulations were:
- extending the use of reliance, a mechanism by which a firm can rely on the CDD carried out by a third party to minimise the duplication of checks;
- exempting from the scope of the 2007 Regulations credit institutions that offer time to pay for non-refundable services but do not lend or advance money;
- bringing UK estate agents selling overseas property within the scope of the 2007 Regulations;
- amending the fit and proper persons test applied by Her Majesty’s Revenue and Customs (HMRC) to decide whether a person is suitable to run a Money Service Business;
- clarifying the right of an individual to appeal against a HMRC decision that he or she is not a fit and proper person;
- amending the enforcement powers of the Office of Fair Trading, HMRC and the Financial Services Authority to ensure compliance with the Regulations (HM Treasury 2012).
The Law Society (United Kingdom) (2009) reported that there were approximately 150,000 regulated private sector entities providing legal services in the United Kingdom. The regulatory requirements are services based and include buying and selling property on behalf of a client, forming a company or trust on their behalf and managing money on a client’s behalf.
The regulatory process in the United Kingdom involves practitioners submitting suspicious activity reports (SARs) to the Serious Organised Crime Agency (SOCA) based on suspected misconduct (HM Treasury 2007). Know your customer is a principal aspect of CDD in the United Kingdom and requires that client identification be based on documents, data and information obtained from a reliable independent source (HM Treasury 2007). Users of the submitted SARs include the HM Revenue & Customs to detect significant numbers of people with undeclared income as noted in a recent report by the House of Commons Committee of Public Accounts (2008).
Since January 2006, barristers practising in England and Wales have been regulated by the Bar Standards Board, whereas solicitors are supervised by the Law Society (UK). The Law Society (UK) contains the Solicitors Regulation Authority that through its Solicitors Disciplinary Tribunal is responsible for hearing and ruling on all allegations of misconduct. According to a 2008 report by the Solicitors Regulation Authority, the majority of allegations and preceding enquiries into misconduct are made against individual practitioners from single partner firms. In the past 12 months, the number of solicitors fined, suspended and reprimanded for misconduct has significantly increased as indicated in Table 15 (SRA 2008). Data are unavailable on the extent of disciplinary action taken in respect of ML/TF by legal practitioners in the United Kingdom.
Regardless of an increase in disciplinary orders made by the Solicitors Disciplinary Tribunal, a recent study reported that 65 percent of solicitors polled continue to use customer identification methods that are insufficient and not recommended in the country’s AML regulations (Montgomery 2008).
The question of whether privileged communications should be subject to reporting requirements has been the subject of considerable debate in the United Kingdom, as has the question of the extent to which legal practitioners should be covered by AML/CTF legislation (Dietz & Buttle 2008).
The most contested issue is whether AML/CTF legislation was intended to override LPP. The decision of the Court of Appeal in Bowman v Fels  EWCA Civ 226, concerning POCA 2002 (UK), confirmed that this was not the case. Legal practitioners are indeed exempt from reporting requirements if they are acting in the process of giving legal advice to a client. These decisions put limitations on the ability to include legal practitioners within the AML/CTF regime and simultaneously highlight the difficulty in adopting identical legislation to cover professionals generally and legal practitioners specifically.
Further issues debated in United Kingdom case law have revolved around the offence of making an arrangement to launder money. Bowman v Fels questioned whether legal practitioners could be involved in arrangements for money laundering if they did not immediately disclose any knowledge or suspicion. It was found that this section of POCA 2002 (UK) was not intended to cover legal practitioners in the context of legal advice or litigation and as stated above, it would not override LPP.
Section 330 of POCA 2002 (UK) provides that a relevant professional adviser who suspects, or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering is exempted from making a money laundering report where that knowledge was gained in privileged circumstances. This reporting exemption does not apply where the information is provided with the intention of furthering a criminal purpose. The legislation defines a relevant professional adviser broadly. The definition includes an accountant, auditor, or tax adviser who is a member of a professional body (or a person in partnership with a professional adviser or who is employed by one). The relevant professional bodies are not comprehensively listed. The concept of a privileged communication emphasises that the professional in question must be advising, representing, or assisting a client (such as by taking a statement). Business communications between the professional and the client are not exempt.
The following provisions in the Money Laundering Regulations 2007 seek to ensure that LPP is preserved, although questions still remain concerning inroads into client confidentiality. These provisions were not subject to amendment by the Money Laundering (Amendment) Regulations 2012.
Regulation 37(7): A person may not be required under this regulation to provide or produce information or to answer questions that he would be entitled to refuse to provide, produce, or answer on the grounds of legal professional privilege in proceedings in the High Court, except that a lawyer may be required to provide the name and address of his client.
Regulation 38(3): Paragraphs Regulation 38(1)(d) and (e) and Regulation 38(2) do not apply to recorded information that the relevant person would be entitled to refuse to disclose on grounds of legal professional privilege in proceedings in the High Court, except that a lawyer may be required to provide the name and address of his client and, for this purpose, regulation 37(11) applies to this paragraph as it applies to regulation 37(7) (Money Laundering Regulations 2007).
There have been occasional cases in the United Kingdom in which solicitors have been convicted of money laundering. Others have been convicted of providing assistance for various offences including money laundering (Middleton 2008).
Failing to report knowledge or suspicion of money laundering to the competent authorities in the absence privileged circumstances can lead to criminal and professional sanctions as illustrated in the case of R v Duff  1 Cr App R (S) 88.
Duff, a 43-year-old English solicitor in sole practice, became friends with, and then represented a man who was later convicted of large-scale drug crime. The man had passed Duff £70,000 in cash between April and May 1997; £10,000 was for legal costs, £50,000 was for an investment in Duff’s practice and £10,000 was for another company established by Duff to promote his practice. In March 1998 the drug dealer was arrested in possession of £5m of cocaine. Duff was instructed to act for him. In September 1998 he was accused of a much wider drug conspiracy. At this point Duff became suspicious. He consulted Law Society literature and reached the conclusion that he was within the law. He took no advice from the Law Society or from another legal adviser. In April/May 1999 the drug dealer was convicted. Duff took advice about his interpretation of the legislation and was reassured by another solicitor that he was correct. He was arrested in October 1999. When interviewed he was not entirely frank although he later said this was a result of having no proper advice. He pleaded guilty to two counts under s 52 of the Drug Trafficking Act 1994 and was sentenced to six months’ imprisonment. The Court of Appeal dismissed his application for leave to appeal that sentence ( NICA 43, (Transcript) R v McCartan: np).
Legal (and other) professionals should also be aware that communications from a client with the intention of furthering a criminal enterprise, or having a criminal purpose, are excluded from LPP (Rees, Fisher & Bogan 2008). Professionals can also be liable in civil law to victims of money launderers that have engaged their professional services (Masefield 2008).
Legal practitioners in the United Kingdom are allowed to reduce client due diligence in certain cases when undertaking business with an individual or entity in a jurisdiction with equivalent anti-money laundering obligations. HM Treasury has issued a list of jurisdictions outside of the European Economic Area that are considered to have equivalent anti-money laundering legislation to the European Union’s Third Money Laundering Directive in May 2008. The Law Society, however, cautioned that the list of equivalent jurisdictions issued by HM Treasury is voluntary, non-binding and does not have the force of law and
in the case of Argentina, Australia, Brazil, Canada, Mexico, and the United States, the anti-money laundering legislation does not apply to lawyers, that is a requirement under the Third Directive. Other countries on the list have been reviewed by FATF that has deemed aspects of their compliance only partial or in some cases there are aspects that are non-compliant. As such, it is not clear that reliance on the list issued by HM Treasury would satisfy the requirements set out in the Money Laundering Regulations 2007 for assessing equivalence (Law Society (United Kingdom) 2009: 16).
Reliance on this list is not considered a valid justification to override the need to assess the risk profile of individual transactions and to continue to operate risk-based procedures when dealing with customers based in an equivalent jurisdiction.
Characteristics of designated non-financial businesses and professions
FATF (2007) estimated that the size of the UK’s total regulated sector was 206,566 entities. DNFBPs in the United Kingdom, like those in Australia, comprise a substantial proportion of the regulated sector in 2007 (see Table 16). The financial sector made up 27.2 percent of the total of known businesses regulated for AML/CTF purposes, money service businesses contributed 30.1 percent and DNFBPs comprised the remaining 42.7 percent.
Table 17 presents the best estimates of the number of businesses providing regulated non-financial services in the United Kingdom in 2007.
Accountants in the United Kingdom do not have any requirements to register with government bodies or to join professional bodies. FATF, as a result, was not able to estimate the total number of accountants at the time of the 2007 Mutual Evaluation.
High-value dealers (including dealers in precious metals and stones)
High-value dealers are all businesses that will accept payments of €15,000 or more in cash. The definition is not restricted by the types of goods sold. Dealers of precious metals and stones are included in the definition of high-value dealers only if they accept payments in cash above the threshold. All businesses willing to accept cash above the threshold are required to register with HMRC. The register currently has 1,500 businesses recorded. As FATF note, many businesses that might be considered dealers of high-value goods in other jurisdictions impose self-restrictions on the value of cash payments and therefore are not considered high-value dealers for AML/CTF purposes in the United Kingdom.
The AML/CTF obligations in the United Kingdom extend to solicitors, barristers, conveyancers and notaries when performing specified functions for clients:
- buying or selling property;
- managing client money, securities, or other assets;
- opening or managing bank accounts, securities or other assets;
- organising contributions to establish, operate, or manage a company; or
- creating, operating, or managing companies, trusts or similar structures.
The Law Society reportedly represents over 115,000 solicitors in England and Wales (Law Society (United Kingdom) 2009). There are 100,938 solicitors with practising certificates in England and Wales, 1,976 in Northern Ireland and 9,637 in Scotland. England and Wales’ 100,938 solicitors work within 9,081 firms, most of which are sole traders and 3,592 of Scotland’s solicitors were the principal solicitors of private firms. England, Scotland and Wales have at least 12,673 solicitors’ firms (FATF 2007).
England and Wales have a further 14,000 barristers, most of whom are self-employed. A further 585 barristers work in Northern Ireland and Scotland has an additional 460 barristers (‘advocates’ in Scotland). The total number of barristers in the United Kingdom is 15,045, based on these figures, and presumably this also represents the best estimate of the number of businesses if most are self-employed persons (FATF 2007).
Most notaries and providers of conveyancing services are solicitors in the United Kingdom. There are, however, 230 separate firms providing conveyancing and an additional 70 notaries public practising as notaries only and not included as solicitors in the United Kingdom in this count. FATF reported that the UK’s conveyancing firms conducted £39b in property transactions in 2005.
The Law Management Section Financial Benchmarking Survey (Law Society United Kingdom 2006), surveying a sample of 269 firms with more than 30 employees, found the median billings per fee-earning legal practitioner for 2006 were £104,379 and the median billings for a partner were £4727,640 in the same period. All but five companies responding to the survey had appointed a money laundering control officer and more than half had made a report (presumably a suspicious transaction report) to the FIU. At the time of the survey in 2006, 12 percent of the companies participating were Limited Liability Partnerships and more than half of respondents indicated the intention to move to that business model.
Real estate agents
FATF estimated that 10,000 real estate agents were operating in the United Kingdom in 2007. There are two industry bodies for real estate agents—the Royal Institute of Chartered Surveyors and the National Association of Estate Agents—each of whom undertakes a character assessment prior to admitting members. Approximately 25 percent of all real estate agents are not members of either industry association and were therefore not subjected to these assessments.
Other selected European Union countries
The AML/CTF regulatory regime extends to numerous DNFBPs throughout the European Union reflecting the common adoption of the EU’s money laundering directives (IMF 2006). The following material provides information on a selection of European countries’ regulations. These countries’ AML/CTF regimes follow the requirements of the Third EU Money Laundering Directive currently in force. In 2012, the European Commission undertook a review of the EU framework which is expected to lead to the introduction of the Fourth EU Money Laundering Directive late in 2013.
Other estimates of the revenue generated by some of the regulated DNFBP sectors are that the accounting, book-keeping, auditing and tax activities in Norway and EU countries produced a turnover of between €55,000m and €60,000m between 2004 and 2005, and legal activities produced revenue of approximately €60,000m during the same time period and in the same countries (Alajaasko 2008). Of the 125 million persons employed in Europe in 2004, 2.5 million worked within the real estate sector and together constituted 897,800 of all registered enterprises earning a total of €460,000m (Eurostat 2004).
Belgium’s AML/CTF regulatory regime encompasses real estate agents, diamond merchants (but not other dealers in precious metals and stones), some legal practitioners (notaries, bailiffs and solicitors), accounting professionals (auditors, chartered accountants, external tax advisors, certified accountants and certified tax accountants) and casinos including gaming halls (IMF 2006). Private security firms that transport cash for clients are also included in the regime.
Legal practitioners in Belgium, like those in the United Kingdom, also have obligations under the regime when engaging in specific transactions—buying and selling real estate including:
- commercial property;
- managing funds, securities and other assets;
- opening or managing bank accounts, savings accounts or portfolios;
- arranging contributions to establish, administer or manage a company; creating, administering or managing trusts, companies or similar structures; and
- acting for or on behalf of a client in any financial or real estate transaction.
The inclusion of any service providers connected to the creation, administration or management of trusts, companies and other similar structures covers all providers of trust and company services companies.
The professions included in France’s regulated sector are similar to those in Belgium, reflecting the common adoption of the EU’s money laundering Directives. Real estate agents, casinos and gaming houses, accountants and high-value dealers (including dealers of precious metals and stones, as well as art and antiques dealers) have AML/CTF obligations in France. Legal practitioners engaging in real estate and financial transactions also have AML/CTF requirements for those transactions (IMF 2005).
All suspicious transactions are to be reported to the French financial intelligence unit, Tracfin, who after analysis decides whether a case should be referred to the Office Central pour la Repression de la Grande Delinquance for investigation. Since 2006, there has been an average annual increase of 3.6 percent in the number of reports submitted to Tracfin. The majority—80.5 percent—of all reports are made by the financial sector, compared with 0.01 percent by legal practitioners, 0.04 percent by real estate agents, 0.01 percent by high-value dealers and 0.48 percent by investment companies (Tracfin 2007). The Conseil National des Barreaux represents and regulates legal practitioners in France and is responsible for the organisation and design of ongoing professional development for legal practitioners (Conseil National des Barreaux 2008). It is obligatory for all financial transactions made by legal practitioners on behalf of a client to be deposited into a CARPA account (Lawyers’ fund for Pecuniary Settlements). CARPA accounts were established by the French Bar Association and are managed by the National Union of Lawyer’s Funds that acts as an intermediary between the funds and the Ministry of Justice. It is comprised of more than 180 local bar associations in metropolitan France, France’s overseas departments and Noumea (UNCA nd: 2). CARPA, similar to client accounts found in the United Kingdom and Australia, oversees the management, monitoring and auditing of third party client funds and ensures absolute traceability. From the moment that finances are deposited into the account, be they in cheque or cash format, certain fundamental pieces of information are established:
- identification of the sources and beneficiaries of finances;
- the description and nature of transactions; and
- proof of a connection between the pecuniary settlements made by legal practitioners and institutions within the framework of their professional service (Wienhofer 2003: 4).
Real estate agents in France are regulated by the legislation of Hoguet 20 July 1972 that is implemented by the government office responsible for competition, consumer affairs and the repression of fraud (Direccion generale de la concurrance, de la consommation et de la repression des fraudes), which is located within the ministry of finance, economy and employment. (FATF 2011).
In Germany, legislation implementing the EU’s Third Money Laundering Directive commenced operation in October 2008, with the provisions extending to financing of terrorism. German laws governing boycotts however, mean that it is illegal for designated entities to apply certain lists of prohibited persons for due diligence purposes. The prohibition extends to lists such as the US Office of Foreign Asset Control list. This creates difficulties for entities that conduct business both in Germany and countries where lists of proscribed persons apply (Blöcker 2008). Germany has also adopted AML/CTF requirements for legal practitioners (IMF 2004). Solicitors and notaries engaging in real estate, financial or trust transactions are included in the designated sector as are real estate agents, accountants, tax consultants, auditors and casinos.
Switzerland became a signatory to the Vienna Convention on 21 September 1988. This Convention concerns drug trafficking, but embodies the first internationally accepted definition of money laundering, along with the requirement for signatory countries to make the provisions of the Convention sovereign law. More recently Switzerland has been praised for its cooperation in transnational financial regulation and AML/CTF. Switzerland has been a participant in freezing Al Qaeda funds and in targeting the financing of their cells (International Relations and Security Network 2001).
Switzerland has also implemented extensive legislative and reporting requirements that make the placement stage of money laundering more difficult. The Swiss financial system, however, continues to deal with shell companies and similar offshore entities that may make Switzerland vulnerable to layering and integration. While the US Department of State praises Switzerland for increased diligence (Wechsler 2001), the CIA World Factbook offers an opinion of Switzerland’s vulnerabilities as ‘Switzerland remains a safehaven for investors…’ (CIA 2008 np), that arguably includes money launderers.
Hong Kong has not included most of the non-financial businesses identified by FATF in the regulated sector. Some, however, have CDD and record keeping obligations issued through industry bodies and regulators. Real estate agents have AML/CTF obligations established by the Estate Agents Ordinance (cap 511) and additional legislation and conduct rules issued by the industry regulator (FATF 2008a).
In Hong Kong, since July 2008, legal practitioners are subject to mandatory CDD and record-keeping obligations specified in a circular with practice directions issued by the Law Society of Hong Kong (Ho 2008). Notaries in Hong Kong require seven years’ experience as a solicitor and must pass an examination to work as a notary public. Notaries in Hong Kong are not able to control or hold money or assets on behalf of clients.
The Hong Kong Institute of Certified Public Accountants has issued guidelines including AML/CTF obligations for members. The obligations include CDD and record keeping, as well as reporting, but are not enforceable for accountants. Auditors must be registered CPAs in Hong Kong and are bound by the Hong Kong Standard on Quality Control 1: Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information and other Assurance and Related Services Engagements, a code of ethics (issued by the Hong Kong Institute of Certified Public Accountants) and other standards that have included CDD and record-keeping requirements. Auditors can be disciplined for failure to comply and in this sense, are included in the regulated sector.
Trust and company services providers may be legal practitioners or accountants and be included in the industry body AML/CTF directives, although the industry has providers outside of these professions. There are two additional industry bodies for trust and company service providers—the Hong Kong Institute of Chartered Secretaries and the Association of Incorporated Services Limited—although providers are not compelled to join either association. The industry, as such, is not part of the regulated sector.
Dealers in precious metals and stones are also not included in the regulated sector by legislation or industry standards.
Characteristics of designated non-financial businesses and professions
The figures in Table 18 estimate the numbers of designated non-financial professional businesses regulated for AML/CTF purposes in Hong Kong. The total estimated number of providers is 11,533. The figures presented in Table 19 estimate the number of financial service providers (banks, insurers, insurance agencies, insurance brokers, and dealers in securities and futures) in Hong Kong in 2006–07. The best estimated number of DNFBPs is more than twice the number of providers of financial services.
Hong Kong had 5,741 solicitors with a practising certificate in May 2007. Of these, 4,678 were employed in 705 private legal firms, 1,965 of which were sole traders or partners. Just under half of the 705 firms (n=315) were sole practitioners and most of these small firms did not employ a second solicitor. A further 53 legal firms were foreign owned. A further 1,063 solicitors were employed by government agencies or other businesses and 2,818 were assistant solicitors or consultants in law firms.
Accountants in Kong Hong must be members of the industry body in order to use the title Certified Public Accountant. Auditors must attain an additional practising certificate. The industry body, the Hong Kong Institute of Certified Public Accountants (HKICPA), had 26,042 individual members in May 2007. There were 3,596 members qualified to perform auditing functions.
The HKICPA listed 3,491 CPA firms in 2008. FATF (2008a) reported a slightly different figure of 3,245 in May 2007. More than half of accounting businesses (n=1,853) in Hong Kong in 2007 were individuals practising in their own names. Of the remaining 1,392 companies, most were registered firms (n=1,170) that were sole traders (n=973) or small businesses with less than five partners (n=185). There were 222 corporate accounting firms in 2007.
Dealers in precious metals and stones
Of the 1,500 estimated dealers in precious metals and stones in Hong Kong, 1,000 are wholesalers or retailers and the remaining 500 are manufacturers. The industry employs approximately 2,500 people.
DNFBPs comprise a very small proportion of Singapore’s regulated sector. Almost all businesses with AML/CTF obligations in Singapore are those regulated by the Monetary Authority of Singapore. Legal practitioners and trustees (although not company service providers who are not legal practitioners or trustees) are the only non-financial industries with preventative AML/CTF requirements. The Law Society of Singapore issues the AML/CTF requirement for legal practitioners and the Institute of Certified Public Accounts of Singapore regulates approved trustees. The best estimate of the total number of designated non-financial businesses regulated for AML/CTF in Singapore is 845 (FATF 2008b).
Although legal practitioners in Singapore are required to report any suspected money laundering, it is not an offence for an advocate and solicitor or his clerks or employees, or an interpreter to fail to disclose any information or other matters that are items subject to LPP under s 39 of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A). Items subject to LPP are:
- communications between the legal practitioners and the client, or any person representing the client, made in connection with the provision of legal advice;
- communications between the legal practitioner and the client, or any person representing the client, made in connection with legal proceedings, or in contemplation of legal proceedings, for the purposes of such proceedings; and
- items enclosed with, or referred to, in such communications and made:
- in connection with the provision of legal advice; or
- in connection with or in contemplation of legal proceedings and for the purposes of such proceedings when they are in the possession of a person who is entitled to possess them, but excluding any communications or items held to further a criminal purpose (FATF 2008b).
Singapore defines trust companies as businesses providing services to establish a trust, act as a trustee, arrange for any person to act as a trustee, or to provide trust administration services. There are some trust company service providers that are not licensed trust companies. Trustees and administrators of business trusts, trustee managers of registered business trusts and administrators of estates of deceased persons are except from the licensing requirement. Banks and holders of financial services licences are also exempt as are legal practitioners. These types of businesses, however, are already regulated for AML/CTF preventative measures. Public accountants and accounting firms are also exempt and these businesses are not regulated for AML/CTF purposes in Singapore.
Company service providers are not explicitly regulated for AML/CTF purposes although, as in other countries, the type of businesses able to offer these services is limited. The persons able to file documents on behalf of third parties are determined by the Business Registration Act, the Companies Act and the Limited Liability Partnerships Act, and are limited to legal practitioners, accountants (members of the Institute of Certified Public Accountants of Singapore), chartered secretaries (members of the Singapore Association of Chartered Secretaries and Administrators) and members of other proscribed professional bodies. Legal practitioners performing company services are regulated for AML/CTF prevention measures.
Characteristics of designated non-financial businesses and professions
DNFBPs make up a very small proportion of Singapore’s regulated sector. Almost all businesses with AML/CTF obligations in Singapore are those regulated by the Monetary Authority of Singapore. Legal practitioners and trust companies are the only non-financial industries with preventative AML/CTF requirements. The requirements do not extend to company service providers that are not legal practitioners.
The Law Society of Singapore issues AML/CTF guidance for legal practitioners and the Institute of Certified Public Accounts of Singapore regulates approved trustees. The best estimate of the total number of DNFBPs regulated for AML/CTF in Singapore is 845 (FATF 2008b).
The FATF (2008b) reported that Singapore had 806 legal practices in 2006. Singapore’s legal practices generated S$837m in revenue in 2000. Most of the revenue was derived from litigation and alternative dispute resolution (41%), corporate law (22%) and conveyancing and property work (21%; Statistics Singapore 2003).
Most of Singapore’s legal practices in 2009 were small businesses (88%), with less than five practitioners employed, 10 percent were medium sized businesses with six to 30 practitioners and large firms made up two percent of the total number in 2009 (Law Society of Singapore 2009). Singaporean firms generated 76 percent of the total receipts for the industry and foreign firms received 34 percent (Statistics Singapore 2003).
Trust and company service providers
Singapore defines trust companies as businesses providing services to establish a trust, act as a trustee, arrange for any person to act as a trustee, or to provide trust administration services. There were 39 licensed trust companies in Singapore in October 2008. There are some trust company service providers that are not licensed trust companies. Trustees and administrators of business trusts, trustee managers of registered business trusts and administrators of estates of deceased persons are exempt from the licensing requirement. Banks and holders of financial services licences are also exempt as are legal practitioners. These types of businesses, however, are already regulated for AML/CTF preventative measures. Public accountants and accounting firms are also exempt and these businesses are not regulated for AML/CTF purposes in Singapore. There were an additional 33 businesses providing trust services in October 2008 although 19 of these were banks, eight were merchant banks, six were solicitors or barristers and all are already regulated for AML/CTF requirements (MAS 2008).
Republic of China, Taiwan
Legislation and characteristics of designated non-financial businesses and professions
Dealers in precious metals and stones and trust businesses are the only designated non-financial service providers to be included in Taiwan’s AML/CTF regime. Jewellers in Taiwan, in addition to dealing in precious metals and stones, also perform other functions associated with financial institutions such as currency exchange. There are no current estimates of the total numbers of jewellers operating in Taiwan.
Foreign currency exchange, a regulated money service business in Taiwan since 2007, is also performed by a wide range of other firms outside of their core businesses. The types of businesses permitted to provide this service are hotels, travel agencies, department stores, handicraft shops, jewellery stores, convenience stores, administrative offices of national scenic areas, sightseeing service centres, railway stations, temples, museums, institutions and associations providing services to foreign travellers or hotels located in remote areas. Unfortunately, the number of businesses providing currency exchange services outside of their core business is not available. The Asia/Pacific Group on Money Laundering (APG 2007) reported the volume of foreign currency transactions passing through jewellers and other small businesses between 2004 and 2006. These are shown in Table 20. The hotel industry was a significant participant in currency exchange and foreign currency transaction in this period.
Canada’s money laundering, possession of the proceeds of crime and terrorism financing offences are in its Criminal Code. In 2000, Canada introduced both the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2000 (PCMLTFA) and established the Canadian Financial Intelligence Unit.
The PCMLTFA currently applies to real estate brokers and accountants/accounting firms. The amendments to the PCMLTFA pre-published on 30 June 2007 and enacted in December 2007 mean that whole or part of the PCMLTFA applied to legal counsel and legal practitioners, British Columbia notaries, public and notary corporations and dealers in precious metals and stones as of December 2008.
Legal practitioners in Canada are governed by the statutes and regulations of the provincial or territorial law society of the province in which they engage in legal practice. The law societies licence legal practitioners and regulate professional conduct, competence and capacity to practise pursuant to legislation in each jurisdiction. The Federation of Law Societies in Canada is a non-statutory representative body of the Law Societies that facilitates regulatory development and cooperation. Legal practitioners (including judges and students) are also represented by the Canadian Bar Association, which is a voluntary association.
In March 2003, legal practitioners and Quebec notaries (who provide legal advice under the Quebec civil code) were exempted from complying with the regulatory provisions of the PCMLTFA when the government revoked the regulatory provisions as they applied to legal counsel. This decision was made as the result of a legal challenge by the profession when the government had initially proceeded to mandate suspicious and prescribed reporting, client identification, record keeping and internal compliance measures when counsel were carrying out various activities on behalf of a client or entity. These activities included receiving or paying funds (other than those relating to professional fees, disbursements, expenses or bail), purchasing or selling securities, real properties, business assets or entities, or transferring funds or securities by any means.
By amendment to the PCMLTFA in December 2006, legal practitioners were made exempt from the suspicious and prescribed transactions reporting requirements of the legislation. Regulations requiring verification of parties to financial transactions enacted under the legislation and in force from December 2008 are applicable to legal practitioners. However, pursuant to an interim injunction obtained through litigation that challenged the constitutionality of the legislation, these regulations cannot apply to legal practitioners without the consent of the Federation of Law Societies of Canada and the other parties to the litigation. The litigation is currently adjourned. If consent is not given, the federal government is entitled to reconvene the litigation on the constitutional question. A decision in this respect is pending. As such, legal practitioners are not subject to the new regulations.
Following the revocation of AML/CTF regulatory provisions as they applied to legal practitioners, the Federation of Law Societies of Canada introduced additional professional rules to address money laundering risks. These included the adoption of a model ‘No Cash Rule’, pursuant to which each member law society has implemented rules restricting legal practitioners from receiving cash in amounts over Can$7,500. All Canadian law societies have adopted local rules that mirror the substance of the new ‘know-your-client’ model rule, which was adopted by the Federation in March 2008. This new rule describes the measures legal practitioners and Quebec notaries must take and the records they must keep to verify a client’s identity. The purpose of this rule is to help practitioners determine whether clients are attempting to use them as an intermediary for ML/TF. Regulations imposing client identification and verification obligations on legal practitioners were implemented in all but three jurisdictions (the Barreau du Quebec, the Chambre des Notaires, and the Law Society of Saskatchewan) at the end of 2008 (IBA 2009).
British Columbian notaries
British Columbia notaries public (including notary companies) have reporting requirements under the PCMLTFA when they engage in receiving or paying funds (other than those received or paid for professional fees, disbursements, expenses or bail), purchasing or selling securities, real property or business assets or entities, or transferring funds or securities by any means.
These specific regulatory requirements include reporting suspicious transactions (where there are reasonable grounds to suspect that a transaction or an attempted transaction is related to the commission, or attempted commission, of a money laundering offence or a terrorist financing offence), the reporting of terrorist property (where there is property under the accountant’s possession or control that is owned or controlled by or on behalf of a terrorist group) and the reporting of cash transactions involving Can$10,000 or more.
Notaries are obliged to maintain the following records—large cash transaction records, receipt of funds records, copies of official corporate records and copies of suspicious transaction reports.
Notaries are obliged to identify any individual or entity where a person conducts a large cash transaction, when an individual has been the subject of a suspicious activity report and an individual or entity about whom the reporting entity has kept a receipt of funds record. Where a large transaction report is required, the reporting entity must take reasonable measures to determine whether the individual is acting on behalf of a third party and what the nature of the relationship is between the individual and the third party.
Finally, notaries are required to maintain a compliance regime involving the appointment of a compliance officer and the development and application of written policies.
Accounting professionals have specific regulatory requirements when they perform the following activities on behalf of a client—receiving or paying funds, purchasing or selling securities, real property or business assets or entities or transferring funds or securities by any means. The requirements also apply when accountants/accounting firms give instructions regarding these activities or when they act on a voluntary basis.
Dealers in precious metals and stones
Dealers are only affected if they engage in purchases or sales of C$10,000. The relevant regulatory requirements are similar to those that have been applied to accountants/accounting firms.
Real estate agents
The PCMLTFA applies to real estate brokers and sales representatives who are acting as agents for the sale or purchase of real estate. The relevant regulatory requirements are similar to those that have been applied to accountants/accounting firms.
Trust and company service providers
Trust and company service providers are not separately regulated in Canada. They do not generally fall under the PCMLTFA Act unless they also operate in a regulated category such as a trust and loan company.
Comparative analysis of regulatory requirements
A comparative summary of the regulatory environment for nonfinancial sector businesses and professions in selected countries is provided in Table 21. The United Kingdom has the most extensive regulation of these sectors for AML/CTF purposes, followed by selected EU and Asian countries. Regulation of these sectors in the United States is comparable to those in Australia, at present.
Hong Kong and Singapore are the only two countries that have included all legal practitioners within the AML/CTF regulated sector for all clients and transactions. Almost all of the other jurisdictions considered in this section have included legal practitioners in the regulated sector only when engaging in financial and real estate transactions. The United Kingdom, Belgium, France and Germany have, for example, taken this approach.
Legal practitioners in the United States are not generally subject to AML/CTF regulation. However, in 2010, the American Bar Association introduced its Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money-Laundering and Terrorist Financing in order to assist legal professionals to avoid money laundering and terrorist financing risks when providing services to clients.
Legal practitioners in Canada were initially included in the regulated sector in 2001 with customer identification, record keeping, reporting and internal compliance procedures for all transactions involving:
- receiving or paying funds other than those representing fees for services, disbursements, expenses or bail;
- purchasing or selling securities, real estate, business assets or entities; or
- transferring funds or securities.
The Canadian requirement also extended to providing advice on transactions of these types. The federation of Canadian Law Societies and the Law Society of British Columbia instigated a constitutional challenge (primarily to the mandatory reporting requirement) on the basis that it undermined LPP. The challenge was adjourned after the Canadian Government repealed the requirements for legal practitioners with Part 1 of the PCMLTFA of Canada that provides the customer identification, suspect transaction reporting and record keeping requirements. Legal practitioners are still bound by Part 2 of the PCMLTFA that requires them to report cross-border movements of currency or other instruments of value.
Following the revocation of AML/CTF regulatory provisions as they applied to legal practitioners, the Federation of Law Societies of Canada introduced additional professional rules to address money laundering risks including the restriction of legal practitioners receiving cash in amounts over Can$7,500 and rules concerning client identification and verification (IBA 2009).
AML/CTF requirements for legal practitioners in the United Kingdom, Belgium, Germany and Singapore are also complicated by the concept of LPP. The requirements for legal practitioners to report suspicious transactions do not apply to information gained in circumstances protected by LPP. In France, for example, client confidentiality and privilege are protected through the use of CARPA accounts. Investigations by police and financial institutions into client CARPA holdings are permitted in the event of an offence directly linked to the account in question. Such investigations are conducted by the CARPA Control Commission. The Control Commission is composed of major organisations within the sector. It also recommends spot checks of transactions below €40,000 and obligatory investigation of anything above this amount (Wienhofer 2003). The CPRA Control Commission reportedly carried out 88 investigations of this nature between 1996 and the year 2000 (UNCA 2000).
The United Kingdom, Belgium, France and Germany have included accountants in the regulated sector as directed by the EU’s Third Money Laundering Directive. Hong Kong’s accountants have AML/CTF obligations if they are members of HKICPA. Accountants performing auditing tasks must be a registered member of the industry body and are thus all encompassed in the guidelines issued by HKICPA.
Real estate agents
Real estate agents are regulated for AML/CTF purposes in almost all of the countries considered here with the exception of the United States and Singapore. Singapore’s inclusion of legal practitioners, with the exclusion of real estate agents, is interesting as is the reverse situation in Taiwan where real estate agents have AML/CTF obligations and legal practitioners do not.
Trust and company service providers
The European countries examined including the United Kingdom include trust and company service providers within the regulated sectors. The other countries considered in this chapter do not. Singapore includes trust companies, performing in Singapore many of the functions FATF have sought to have included in the regulated sector, but have excluded company service providers. Legal practitioners providing this service in Singapore have obligations, although accountants (whether providing company services or not) are not included in the regulated sector.