JOINT CPD SEMINAR 21 st JULY 2007 BLACKHALL PLACE MONEY LAUNDERING NIGHTMARES FOR LAWYERS. JAMES MacGUILL

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1 JOINT CPD SEMINAR 21 st JULY 2007 BLACKHALL PLACE MONEY LAUNDERING NIGHTMARES FOR LAWYERS JAMES MacGUILL INTRODUCTION Firstly I would like to introduce myself and take the opportunity to thank you for attending today s seminar. My name is James MacGuill and I am a practising solicitor and Chair of the Law Society s Anti Money Laundering task force. This group was established by the Society to articulate the deeply felt opposition within the legal profession to the interference with the traditional lawyer/client relationship brought about by the second money laundering directive. Much of today s discussion will centre around what we believe were the unintended but nonetheless real problems that that legislation has created for us all, but I think that in order to put our concerns in to context it is nonetheless important that we briefly look historically at how the present law has come to be. The first money laundering directive was given domestic effect in the Criminal Justice Act The main money laundering offences were created by Section 31 of that Act and specific obligations were imposed on the bodies to whom the Act was to apply by Sections 32 and Sections 57 and 58. That measure was truly one that was targeting major international crime, particularly drug trafficking by applying itself to banks and credit institutions through whom it might be expected that large sums of cash would indeed be laundered. However concerns were soon expressed that sophisticated international bosses were able to avoid the traps set for them in the first directive by masking their transactions through legitimate business rather than bank accounts and therefore economic areas such as real estate and high worth items became the tool of choice for the money launderer. 1

2 The second money laundering directive addressed the regulation to those sectors and for the first time solicitors, and our counterpart legal professionals throughout Europe were to be designated bodies for the purposes of the regulations. With designation came responsibilities of record keeping, training but most controversially reporting. Section 57 of the Act introduced for the first time an obligation on a solicitor to report suspicions, no more than that, concerning his client arising from instructions received in specified types of work to the authorities in one of the many slights of legislative hand in the whole money laundering sphere the relevant authorities were no longer only An Garda Siochana who understandably might have an interest in tracking sophisticated organised international crime, but also the Revenue Commissioners whose interest is much more likely to be domestic. There is on our assessment nothing casual or accidental by the fact that the powers intended to combat international crime were very quickly embraced and adapted for domestic fiscal purposes. Indeed the practice of using Brussels directives as a vehicle to add on even more complicated national rules, the conduct known as gold plating has been roundly criticised in many quarters. It is ironic, and of course hypocritical, that one of the critics was Mr. Charles McCreevy notwithstanding his history as Minister for Finance, was still this week prepared to say National regulators and governments must be disciplined when it comes to transposing directives to avoid doubling up through gold plating, which adds costs and complexity and undermines the huge benefits that a single European rule book can bring As we shall see it is precisely this practice of gold plating which has created significant if not insuperable problems for lawyers who merely seek to go about their professional life in an honest and ethical fashion. 2

3 The proposed reporting obligation was anathema to lawyers in every jurisdiction in the European Union. Each domestic society examined whether or not the obligation could be successfully challenged in the domestic courts in our case on Irish or European grounds. The problem we encountered of course, which is not a problem necessarily applicable in other jurisdictions, is that a virtue of Article 29 of the Constitution the domestic legislation would be immune from constitutional challenge to the extent that it was required as an obligation of membership of the European Union. It is of course possible that in an appropriate case there may be scope for a challenge but on the information available to us to date the outcome is far from promising. It is fair to say that our Society in common with other Bar Associations throughout Europe was agitated mainly in the first instance by the reporting obligation. As recently as the 26 th of June of this year case C-305/05 the Belgian Bar Associations received judgement from the Grand Chamber of the European Court on a challenge that they brought through their domestic courts. The court ruled in that case: 33 As was pointed out in paragraph 22 above, it is clear from Article 2a(5) of Directive 91/308 that the obligations of information and cooperation apply to lawyers only in so far as they advise their client in the preparation or execution of certain transactions essentially those of a financial nature or concerning real estate, as referred to in Article 2a(5)(a) of that directive or when they act on behalf of and for their client in any financial or real estate transaction. As a rule, the nature of such activities is such that they take place in a context with no link to judicial proceedings and, consequently, those activities fall outside the scope of the right to a fair trial. 34 Moreover, as soon as the lawyer acting in connection with a transaction as referred to in Article 2a(5) of Directive 91/308 is called upon for assistance in defending the client or in representing him before the courts, or for advice as to the manner of instituting or avoiding judicial proceedings, that lawyer is exempt, by virtue of the second subparagraph of Article 6(3) of the directive, from the obligations laid down in Article 6(1), regardless of whether the information has been received or obtained before, during or after the proceedings. An exemption of that kind safeguards the right of the client to a fair trial. 35 Given that the requirements implied by the right to a fair trial presuppose, by definition, a link with judicial proceedings, and in view of the fact that the second subparagraph of Article 6(3) of Directive 91/308 exempts lawyers, where their activities are characterised by such a link, from the obligations of information and cooperation laid down in Article 6(1) of the directive, those requirements are respected. 3

4 36 On the other hand, it must be recognised that the requirements relating to the right to a fair trial do not preclude the obligations of information and cooperation laid down in Article 6(1) of Directive 91/308 from being imposed on lawyers acting specifically in connection with the activities listed in Article 2a(5) of that directive, in cases where the second subparagraph of Article 6(3) of that directive does not apply, where those obligations are justified by the need emphasised, in particular, in recital 3 of Directive 91/308 to combat money laundering effectively, in view of its evident influence on the rise of organised crime, which itself is a particular threat to society in the Member States. 37 Having regard to the foregoing, it must be held that the obligations of information and of cooperation with the authorities responsible for combating money laundering, laid down in Article 6(1) of Directive 91/308 and imposed on lawyers by Article 2a(5) of that directive, account being taken of the second subparagraph of Article 6(3) thereof, do not infringe the right to a fair trial as guaranteed by Article 6 of the ECHR and Article 6(2) EU. Costs 38 The obligations of information and of cooperation with the authorities responsible for combating money laundering, laid down in Article 6(1) of Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, as amended by Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001, and imposed on lawyers by Article 2a(5) of Directive 91/308, account being taken of the second subparagraph of Article 6(3) thereof, do not infringe the right to a fair trial as guaranteed by Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms and Article 6(2) EU. Accordingly the contention that the obligation to report suspicious transactions imposed on lawyers was unlawful is now a lost argument. While some of the language is on the vague side, particularly paragraph 34, there can be no doubt but that the reporting obligation is consistent with European Union law and accordingly the advise we have received in respect of the prospects of a successful challenge here in Ireland appears to have been the correct advice and that any challenge would be unsuccessful. We tried to use all available influence to impress upon government that notwithstanding that they were entitled to designate solicitors for the purposes of the Money Laundering Regulations that they should not do so. Unfortunately this argument was also lost and solicitors were designated by S.I. on.. Perhaps the only concession we received at all during this process related to Section 58. Section 58 of the Act makes it an offence to tip off a client that there is a money laundering investigation 4

5 underway in relation to that client. This provision created an acuted difficulty for a solicitor who forms a suspicion and makes the appropriate report under Section 57. If he continues to act there is the danger that he will become complicit in the substantive offence himself. It might not necessarily be the position that An Garda Siochana would agree that the solicitor was now acting at their request and therefore immune from prosecution. Indeed what solicitor would want to continue in a hazardous activity of that kind where perhaps his own life would become an issue if he were to become essentially the key prosecution witness? Those colleagues who are reluctant to cease to act simply because they are concerned that they will not now be paid would be in the minority. On this subject we did receive comfort from the Minister for Justice, Equality & Law Reform who confirmed that he following advice from the Attorney General was of the view that there was no impediment to a solicitor advising a client that he was unhappy to continue acting and that this would not infringe the legislation. Our state of knowledge therefore at that point was that there was a reporting obligation on solicitors in certain cases and that it would be unlikely that this would be successfully challenged domestically. The obligation however arose only in relation to certain categories of work basically analogous to the distinction we have been familiar with since Smurfit Paribas as between legal advice and legal assistance. The reporting obligation was clearly therefore one that was going to apply to transaction based lawyers particularly company lawyers, conveyancers, financial advisers etc. Our concerns however turned to transactions which are not capable of easy categorisation as either being litigation or assistance. While it is not the only example the example of family law litigation falls in to this category, and it is why this topic is a particular concern to you as practising family lawyers. At its simplest the concern we had was whether or not the reporting obligation, from which family lawyers in the court phase of the process are exempt, nonetheless kicked in if 5

6 following a hearing or settlement the lawyer was requested or required to conduct transaction based work to give affect to the settlement. Many lawyers had by now taken heart at the decision of the English Court of Appeal in Bowman v- Fels which essentially immunised English lawyers from the obligations of their domestic legislation. However Bowman v- Fels is an unsatisfactory and uncomforting authority for many reasons not least because it is specific to English legislation which is in starkly different terms to ours, but also because there is more than a hint of it being a result oriented decision in which all the parties were complicit. Our concern was informed by the fact that the definition of proceeds of criminal conduct, being so broad as to include untaxed income, might mean that even a comparatively small portion of community assets if untaxed, could taint the entire pie. Practitioners were in a position to identify many scenarios from practical experience where for instance the parties in their instruction allege and in some cases acknowledge that some of the community property is indeed tainted. There would be other cases where the allegation is neither made nor acknowledged but that the asset pool is plainly inexplicable based on the clients own claimed reliance on social welfare etc. In some family law cases parties who are not by their nature overly generous maybe particularly accommodating in the context of a settlement giving rise to suspicion. There are parties who under no circumstances wish the matter to be aired before a court and enter in to a settlement in circumstances where there may be a real concern as to the nature of the conduct. To address our concerns we entered in to a lengthy process of a consultation with colleagues expert in the field, with Gerard Durcan SC an acknowledged expert in family law and because of issues that came more fully in to focus with Paul Anthony McDermott BL for his criminal law experience. 6

7 I propose now to pause at this stage in order that you might hear both from Gerry and Paul Anthony and I will resume briefly thereafter to indicate the advice the Society proposes to give to its members. 7