Strategic analysis brief Money laundering through legal practitioners

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1 Strategic analysis brief Money laundering through legal practitioners

2 Strategic analysis briefs AUSTRAC strategic analysis briefs provide insights for government and industry on money laundering and terrorism financing (ML/TF) risks, trends and methods. These briefs aim to assist Australian businesses by providing information that may be helpful in identifying and mitigating the risk of their business being misused by criminals. This information can be relevant to their AML/CTF programs, policies and procedures help to inform their management and mitigation of ML/TF risk enhance the quality of reporting to AUSTRAC. This work is licensed under a Creative Commons Attribution 4.0 International License. Attribution: Material obtained from this document is to be attributed to: AUSTRAC for the Commonwealth of Australia Money laundering through legal practitioners

3 Purpose 4 Key points 4 Background 4 Legal practitioners and AML/CTF regulation 6 Reporting obligations under the FTR Act 6 Reporting obligations under the AML/CTF Act 6 Money laundering vulnerabilities 7 Money laundering methods 8 Method 1 Use of legal practitioners to conduct transactions 8 Method 2 Use of legal practitioner s trust or investment account 8 Method 3 Use of legal practitioners to recover fictitious debts 10 Method 4 Buying and selling real estate 11 Method 5 Establish corporate structures 12 Indicators 14 Conclusion 14 Where can I get more information? 15 References 15 Money laundering through legal practitioners 3

4 To provide information about money laundering methods, vulnerabilities and indicators associated with money laundering through legal practitioners in Australia. In Australia, organised crime groups are using complex commercial structures to support criminal activity and launder money. This requires organised crime groups to engage the services of professionals such as legal practitioners. Legal practitioners can act as an entry point for those seeking to use financial and corporate systems to launder illicit funds. Organised crime groups are likely to continue to seek the services of legal practitioners to launder their illicit funds. The use of legal practitioners to launder illicit funds is an internationally established money laundering method. 1 In Australia, the increasing complexity and sophistication of money laundering schemes has seen organised crime groups seek specialist advice and skills of professionals, such as legal practitioners. 2 Professionals are known as gatekeepers or facilitators because they can act as an entry point for those seeking to misuse legitimate financial systems and corporate structures for money laundering. In this context, legal practitioners provide specialist advice and skills which can be used to launder illicit funds. 3 1 Financial Action Task Force (FATF), Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, 25 June 2013, p. 7, viewed 9 February 2015 < FATF has also documented the use of legal practitioners in complex money laundering schemes. Refer to FATF (2010), Money Laundering Using Trust and Company Service Providers, October 2010, viewed 9 February 2015, <www.fatf-gafi.org/topics/methodsandtrends/documents/moneylaunderingusingtrustandcompanyserviceproviders.html>. 2 Australian Crime Commission (2013), Professional Facilitators of Crime, ACC Crime Profile Series, July 2013, viewed 9 February 2015 <https://www.crimecommission.gov.au/publications/intelligence-products/crime-profile-fact-sheets/professional-facilitators-crime>. 3 Professionals include legal practitioners, accountants, real estate agents and financial advisors. 4 Money laundering through legal practitioners

5 In January 2015 it was estimated that approximately 100,039 people and 19,167 businesses were engaged in providing legal services in Australia. 4 19,167 businesses providing legal services as at Jan ,039 people providing legal services as at Jan 2015 Legal practitioners, either wittingly or unwittingly, may provide or offer their technical expertise and know-how to a client which can facilitate money laundering. Services that are susceptible to money laundering include: managing clients finances, investments and other assets debt recovery buying and selling real estate establishing and administering complex domestic and foreign legal entity structures (such as trusts and companies) and accounts. 5 Australian and overseas-based organised crime groups use legal practitioners to undertake transactions to: conceal proceeds of crime obscure ultimate ownership through complex layers and legal entity structures avoid tax work around regulatory controls provide a veneer of legitimacy to criminal activity create distance between criminal entities and their illicit income or wealth avoid detection and confiscation of assets hinder law enforcement investigations. 4 Legal Services in Australia: Market Research Report, IBISWorld, May 2013, viewed 9 February 2015 <www.ibisworld.com.au/industry/ default.aspx?indid=560>. 5 Legal entity structures include corporations, trusts and foundations. Money laundering through legal practitioners 5

6 Australia s AML/CTF regime is established under the Financial Transaction Reports Act 1988 (FTR Act) and the Anti- Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). Australia s AML/CTF regime captures some, but not all, transactions involving legal practitioners. Reporting obligations under the FTR Act Under section 15A of the FTR Act, solicitors have obligations to provide significant cash transaction reports to AUSTRAC. 6 This reporting obligation is triggered if a significant cash transaction is entered into by, or on behalf of, a solicitor in the course of practising as a solicitor. A significant cash transaction is defined as a cash transaction involving the transfer of currency equivalent to AUD10,000 or more. transactions => $10,000 Submit a SCTR Reporting obligations under the AML/CTF Act Under the AML/CTF Act, all entities that provide certain designated services are reporting entities under the Act and therefore subject to regulation by AUSTRAC. Legal practitioners are generally not subject to the obligations set out in the AML/CTF Act, although they may have obligations if they offer any of the designated services covered by the Act. For example, legal practitioners involved in the provision of mortgages and the operation of mortgage investment schemes may be providing designated services, and therefore be considered reporting entities under the AML/CTF Act. 7 The Act requires reporting entities to submit, among other things, suspicious matter reports (SMRs) to AUSTRAC. The AML/CTF Act does not affect the law relating to legal professional privilege. 6 Section 3 of the FTR Act defines solicitor as a person who practises as a solicitor, whether by himself or herself, as a member of a solicitor corporation or as a member of a partnership of solicitors, and whether or not the person also practises as a barrister. 7 Designated services cover a range of business activities and are listed in Tables 1, 2, and 3 in Section 6 of the AML/CTF Act. Also see the exempt legal practitioner service, which is listed at item 46(b) of Table 1 section 6 of the AML/CTF Act, and is also defined at section 5 of the Act. 6 Money laundering through legal practitioners

7 Legal practitioners and risk management strategies The Law Council of Australia has indicated that the introduction of anti-money laundering customer due diligence requirements would be likely to contribute significantly to general risk management strategies of legal practitioners. The council highlighted data from legal insurers which showed a large proportion of claims and complaints could have been avoided if legal practitioners employed more vigorous client selection and acceptance policies. Some claims arose from legal practitioners failing to adequately identify clients and failing to identify the risks associated with specific clients and transactions. 8 Money laundering vulnerabilities associated with legal practitioners include: The types of services provided by legal practitioners make them attractive for money laundering. Legal practitioners can play a key role in providing advice and services that assist criminal groups with establishing legal, corporate and financial structures to launder illicit funds. Legal practitioners provide a veneer of legitimacy. The professional status of legal practitioners enhances the legitimacy of transactions and financial activity, and correspondingly reduces the risk of such activity raising suspicion. 8 Law Council of Australia (2009), Anti-Money Laundering Guide for Legal Practitioners, p. 17, viewed 9 July 2013, <www1.lawcouncil. asn.au/lawcouncil/images/lca-pdf/a-z-docs/amlguide.pdf>. Money laundering through legal practitioners 7

8 An examination of domestic and international money laundering case studies reveals five methods of money laundering through legal practitioners. The methods show how a legal practitioner s services may be targeted for money laundering or other criminal purposes. Method 1 Use of legal practitioners to conduct transactions To avoid direct involvement in the money laundering process, criminals may use legal practitioners to move funds and undertake transactions on their behalf. This can conceal the connections between criminals, the proceeds of their crimes and money laundering activity. Legal practitioners may be complicit or unwittingly involved in the money laundering activity, and may be used to move cash, deposit and transfer or withdraw funds or to open bank accounts. The following case highlights the use of a legal practitioner to open bank accounts and transfer funds. Case 1 Use of legal practitioner to open accounts An international investigation into suspected money laundering resulted in a lawyer being charged with money laundering offences and arrest warrants issued for a Brazilian national and his de facto partner. The Brazilian national (the suspect) and his partner were on bail in Brazil for a number of criminal charges. Despite being on bail, they moved to New Zealand with their family and shortly after arriving opened a number of bank accounts in the presence of an immigration lawyer. During a three-month period more than NZD3.5 million was deposited into the accounts via international money transfer. The suspect and his partner subsequently left New Zealand. In their absence, a further 40 accounts were opened by the lawyer on their behalf. The lawyer was also suspected of moving funds through his trust account and witnessing statutory name change documentation for the suspect and his family. 9 Method 2 Use of legal practitioner s trust or investment account Legal practitioners operate trust accounts to deposit, hold and disburse funds on behalf of clients. 10 Criminals may use legal practitioners to facilitate the movement of illicit funds through their trust accounts. Funds moving through legal practitioners trust accounts provide legitimacy and credibility to transactions that may otherwise appear suspicious. 9 APG (2010), APG Typologies Report 2011, p. 53, viewed 9 February 2015, <http://www.apgml.org/methods-and-trends/documents/ default.aspx?s=date&c=2f18e b16a-8112ffa857b1>. 10 A trust account is an account held with an authorised deposit-taking institution by a third party such as a legal practitioner. Funds are generally held on behalf of two other parties involved in a transaction until instructions are received or certain obligations are met. For example, a trust account is used by a solicitor or conveyancer during the sale of real estate. 8 Money laundering through legal practitioners

9 Australian legal practitioners have informed AUSTRAC of receiving unusual requests from prospective clients, particularly targeted at moving funds through legal practitioners trust accounts. An example of these requests includes: A foreign investor transfers large amounts into the firm s trust account, allegedly to purchase property and make other investments. The investor subsequently advises that the proposed investments are not proceeding and requests that their funds be paid to multiple other persons. 11 The following case highlights the use of a law firm s trust account to launder funds. The use of Australia-based legal practitioners by overseas entities is also mentioned. Case 2 Law firm unwittingly launders AUD260,000 through trust account An individual is alleged to have fraudulently obtained AUD260,000 from a United Kingdom (UK) bank account and used an Australian law firm to unwittingly launder the illicit funds. An employee of a law firm received an from a web-based account referring to a previous conversation where it was agreed the law firm would act on the individual s behalf. The individual asked the employee to assist in the purchase of machinery in the UK by facilitating the transfer of AUD260,000 from the individual to a bank account in the UK. Without undertaking reasonable checks to confirm the individual s identity, the employee provided details of the firm s trust account and confirmed the firm would act for the individual. After the AUD260,000 was transferred to the firm s trust account, the individual requested the money to be transferred as soon as possible to another bank account in the UK after costs and transfer fees were deducted. The employee executed a subsequent transfer of AUD258, to the designated account as instructed, facilitating the laundering of the allegedly stolen funds. The Australia-based Office of the Legal Services Commissioner (OLCS) received a complaint from the UK bank. The OLSC concluded that the law firm had failed to adequately establish the identity and contact details of the individual. This was particularly important given the individual was not an existing client of the law firm. Further, the law firm failed to demonstrate a reasonable standard of competence and diligence by not enquiring about the basis for a significant trust account transaction. 12 Case study 45 in the AUSTRAC Typologies and case studies report 2007 provides an additional example involving this method. 11 AUSTRAC, Money laundering in Australia 2011, p. 28, viewed 9 February 2015 <http://www.austrac.gov.au/money_laundering_in_ australia_2011.html>. 12 Mark, S, 2007, Money Laundering and Trust What Role for Lawyers?, pp. 1 and 2, paper presented at the Marcus Evans Anti-Money Laundering Conference, Sydney, 6 7 March 2007 at Office of Legal Service Commissioner, viewed 9 February 2015 <http://www. olsc.nsw.gov.au/agdbasev7wr/olsc/documents/pdf/money_laundering_trust_what_role_lawyers.pdf>. Money laundering through legal practitioners 9

10 Method 3 Use of legal practitioners to recover fictitious debts The use of legal practitioners in schemes designed to look like debt recovery is an area of concern in Australia and overseas. 13 Criminals use legal practitioners to move illicit funds disguised as being the proceeds of legitimate debt recovery action through legal practitioners trust accounts. Two variations of this method are outlined below. Part A 1. A foreign company requests the debt recovery services of an Australia-based legal practitioner. 2. The foreign company (the client) may offer to pay legal fees above standard rates. 3. The legal practitioner performs little, if any, debt recovery work on behalf of the client. Instead, the legal firm quickly receives substantial amounts of money from the supposed debtors (either in Australia or overseas). 4. The legal practitioner advises the client when funds have been received and sends the funds to the client s account or a third-party account, sometime based in a third country. Essentially, illicit funds disguised as outstanding debts are moved through the legal practitioner s trust account and returned to the client as apparently legitimately derived funds. Part B A variation of the above method involves the establishment of a cash intensive business to allow legitimate funds to be commingled with illicit funds, as follows: 1. The business creates false invoices to provide a facade of debts owing. 2. A legal practitioner is engaged for debt recovery services. 3. Debtor payments (which are actually illicit funds) are paid to the legal practitioner and subsequently returned to the client. 13 See fn. 11, p. 28. Also, see Laundering in litigation, The Law Society of England and Wales, 9 February 2009, viewed 9 February 2015 <http://www.lawsociety.org.uk/support-services/advice/articles/laundering-in-litigation/>. 10 Money laundering through legal practitioners

11 Method 4 Buying and selling real estate Many legal practitioners engage in conveyancing and other services associated with the buying and selling of real estate. Services include preparing legal documents, facilitating payments and generally acting on behalf of clients. Legal practitioners may knowingly or unwittingly assist criminals to launder money through real estate by: establishing and maintaining domestic or foreign legal entity structures (e.g. trusts or proprietary companies) and accounts facilitating or conducting financial transactions receiving and transferring large amounts of cash falsifying documents (e.g. buying real estate in a false name) establishing complex loans and other financial arrangements facilitating the transfer of ownership of property to nominees or third parties. Criminals may also use multiple professionals or gatekeepers to further complicate the money laundering process in an effort to avoid detection. Case study 40 in the AUSTRAC Typologies and case studies report 2008 involves the buying of property in a false name. The legal practitioner was also used in this instance to sign the transfer documents on behalf of the suspect. The case highlights the importance of customer identification. Money laundering through legal practitioners 11

12 Method 5 Establish corporate structures Legal practitioners have specialist skills in, and knowledge of, the establishment and administration of corporate structures. These structures may include layers of companies and trusts in several foreign jurisdictions. These structures allow criminals to conceal illicit funds, obscure ownership through complex layers, legitimise illicit funds and in some cases avoid tax and regulatory controls. Establishing corporate structures in jurisdictions with preferential tax regimes and secrecy provisions provides a layer or insulation between criminals and their activities. This helps criminals to put distance between themselves and their illicit activities and funds. The following is an example of this method. 1. An organised crime group based in Country A engages in criminal activity which generates illicit funds. The criminal group is controlled by Suspect A. 2. The criminal group engages the services of a legal practitioner who establishes two separate networks of corporate structures which the criminal client intends to use to conceal illicit funds. The funds are laundered to allow the criminal group to buy assets and finance further criminal activity. The two networks operate as follows: Network 1 3. The legal practitioner incorporates several shell companies in Country B, a jurisdiction with strict secrecy provisions. 14 A management company in Country C administers these shell companies. This distances the criminal group from the shell companies. Suspect A holds 100 per cent of the bearer shares in the shell companies. The use of bearer shares conceals the criminal s commercial interest in the shell companies Third parties and corporate entities in Country A are used to transfer illicit funds to the corporate entities in Country B. The third parties have no apparent or obvious association with the criminal group. This distances the criminals from the money laundering process. In some cases third parties may be cleanskins complicit or manipulated third parties who have no criminal record. 5. Illicit funds are given to the third parties and corporate entities to transfer to the accounts of shell companies in Country B. 6. The third parties may also be used to physically courier illicit funds to Country B to be deposited into the bank accounts of the shell companies. 7. The funds are sent to a legal practitioner s trust account in Country D seemingly for the benefit of commercial clients (the criminal group) in Country A. The funds are used by the criminal group to finance further criminal activity, such as drug trafficking. 14 A shell company is a company that, at the time of incorporation, has no significant assets or operations. Shell companies can be set up domestically or offshore and the ownership structure of a shell company can take several forms. Shell companies have no physical presence, employees or products and may owned by corporations, nominee owners and bearer shares, obscuring beneficial ownership. 15 Bearer shares are negotiable instruments that accord ownership of a corporation to the person who possesses the share certificate. They are vulnerable to misuse because the share certificate does not reveal the name of the shareholder and is not registered. Under the Corporations Act 2001 (Cth) an Australian company is not permitted to issue bearer shares. 12 Money laundering through legal practitioners

13 Network 2 8. The legal practitioner establishes a separate corporate network, similar to the one described above, to buy high-value goods such as real estate. This allows the criminal group to reinvest the illicit funds in the legitimate economy and conceal the proceeds of crime. 9. With the illicit funds spread across two networks of corporate structures, the risk of detection is minimised and the likelihood of confiscation of proceeds of crime is diminished. The diagram below provides an overview of this method for Network 1. Diagram Overview of corporate structures established for Network 1 Money laundering through legal practitioners 13

14 The following indicators may assist to identify potential money laundering or terrorism financing activity. Although the existence of a single indicator does not necessarily indicate illicit activity, it should encourage further monitoring and examination. In most cases it is the existence of multiple indicators which raises suspicion of potential criminal activity. Complex transactions in which multiple properties are bought, re-sold or exchanged Customer buys multiple properties in a short period of time Customer uses cash to settle transactions which are usually not cash-based Deposits made to a legal practitioner s trust account to fund transactions (for example, real estate purchases) which never eventuate International funds transfer instruction to or from legal firm s trust account to or from bank secrecy jurisdictions, offshore companies or AML/CTF high-risk jurisdictions 16 Legal entity structures are used in transactions for no apparent commercial or other reason Legal practitioner manages the purchase or transfer of property which is fully or substantially funded in cash Multiple unexplained funds transfers to overseas beneficiaries Significant and/or structured cash deposits to and withdrawals from a legal practitioner s trust account Structured cash deposits into an account and then funds withdrawn via transfer or bank cheque to a payee that is a legal firm s trust account Transactions involving politically exposed persons (PEPs) 17 Transactions where there are doubts about the validity of the documents submitted with loan applications Ultimate source of deposits cannot be easily identified; for example, an international funds transfer where the ordering and beneficiary customers are the same Unexplained deposits made by overseas-based entities into legal practitioner s trust account Unusual payment arrangement included in the terms of contract for sale or purchase of real estate Australia-based and overseas-based crime groups use professionals such as legal practitioners to help undertake transactions and establish corporate structures in support of criminal activity and to launder illicit funds. Legal practitioners are attractive for money laundering due to their combination of services, expertise and professional standing. Legal practitioners may provide an entry point for those seeking to exploit financial and corporate systems to conceal illicit wealth and facilitate criminal activity. 16 High-risk jurisdictions are jurisdictions known to be a source of narcotics or other significant criminal activity, any jurisdiction subject to sanctions, jurisdictions known to be a secrecy haven or preferential tax regime, or jurisdictions linked to proscribed terrorist organisations. 17 PEPs are domestic or foreign individuals who are or have been entrusted with prominent public functions for example: Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political officials. For further information see AUSTRAC compliance guide <http://www.austrac.gov.au/ part-b-amlctf-program-customer-due-diligence-procedures#peps>. 14 Money laundering through legal practitioners

15 The use of a legal practitioner to launder funds provides the appearance of legitimacy to transactions and financial activity linked to criminal enterprises. It also distances criminals from their illicit activities and funds. As an established money laundering channel with limited AML/CTF regulation, criminals are likely to continue to use legal practitioners to launder funds. You can contact your AUSTRAC Relationship Manager or the AUSTRAC Contact Centre. Telephone: Information is also available on the AUSTRAC website at Asia/Pacific Group on Money Laundering (2010), APG Typologies Report 2011, viewed 9 February 2015 <www. apgml.org/methods-and-trends/documents/default.aspx?s=date&c=2f18e b16a-8112ffa857b1> AUSTRAC, AUSTRAC Typologies and Case Studies Report 2007, viewed 9 February 2015 <http://www.austrac.gov. au/typologies2007.html> AUSTRAC, AUSTRAC Typologies and Case Studies Report 2008, viewed 9 February 2015 <http://www.austrac.gov. au/typologies_2008.html> AUSTRAC, Money laundering in Australia 2011, viewed 9 February 2015 <www.austrac.gov.au/money_ laundering_in_australia_2011.html> Australian Crime Commission (2013) Professional Facilitators of Crime, ACC Crime Profile Series, July 2013, viewed 9 February 2015 <www.crimecommission.gov.au/publications/intelligence-products/crime-profilefact-sheets/professional-facilitators-crime> FATF, Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, 25 June 2013, viewed 9 February 2015 <www.fatf-gafi.org/documents/documents/mltf-vulnerabilities-legal-professionals.html> FATF (2010) Money Laundering Using Trust and Company Service Providers, October 2010, viewed 9 February 2015 <www.fatf-gafi.org/topics/methodsandtrends/documents/ moneylaunderingusingtrustandcompanyserviceproviders.html> Laundering in litigation, The Law Society of England and Wales, 9 February 2009, viewed 9 February 2015 <www.lawsociety.org.uk/support-services/advice/articles/laundering-in-litigation/> Law Council of Australia (2009), Anti-Money Laundering Guide for Legal Practitioners, December 2009, viewed 9 February 2015 <www1.lawcouncil.asn.au/lawcouncil/images/lca-pdf/a-z-docs/amlguide.pdf>»» Mark, S, 2007, Money Laundering and Trust What Role for Lawyers?, pp. 1 and 2, paper presented at the Marcus Evans Anti-Money Laundering Conference, Sydney, 6-7 March 2007 at Office of Legal Service Commissioner, viewed 9 February 2015 <www.olsc.nsw.gov.au/agdbasev7wr/olsc/documents/pdf/money_laundering_trust_ what_role_lawyers.pdf> Money laundering through legal practitioners 15

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