Politics & Law

Lawyers and money laundering

10 May, 2023

Is Taiwan doing enough to ensure that local lawyers are serving as gatekeepers rather than crime enablers?


By Paul Shelton

Over recent years, the Financial Action Task Force (FATF) and some law enforcement agencies have shown interest in lawyers and other professionals as potential crime enablers, though prior to that the main focus of money laundering (ML) research was on criminal organisations and the financial sector.


‘Crime enablers’ does have harsh connotations and perhaps some law firms and lawyers deserve that label. However for the purposes of this article let’s use the term ‘gatekeepers’, which is arguably more neutral, but gates do keep people out.


The 1960s was seen as an era in which lawyers, accountants and policy entrepreneurs devised ways of making their jurisdictions (and often themselves) richer by out-competing others in secrecy and tax avoidance measures. This behaviour was irrespective of the ethical basis for the wealth they were attracting. There was little interest in the broader socio-economic impacts of crimes and tax evasion.


The 1980s, and beyond have witnessed intense counter measures from the Anti-Money Laundering (AML) and anti-corruption movements.


At the forefront of these movements has been FATF. The FATF leads global action to tackle money laundering, terrorist and proliferation financing. The FATF researches how money is laundered, and terrorism is funded, promotes global standards to mitigate the risks, and assesses whether countries are taking effective action.


In 2001, the FATF depicted lawyers as potential “gatekeepers” to money laundering and terrorist financing efforts, due to the varied nature of services they provide to their clients.


The FATF’s Report on Money Laundering Typologies 2000-2001 stated that lawyers are vulnerable to complex money laundering schemes due to their ability to easily switch between advising on financial and fiscal matters, establishing trusts and corporate entities and completing property and other financial transactions, such as investments.


Other professionals also tend to regard lawyers as conferring some sort of legitimacy when a client is referred to them, that is legitimacy by association. However, if lawyers are not obliged to carry out client due diligence checks or report any suspicions that they may have that their client may be involved in money laundering or terrorist financing efforts, they are potentially allowing an unsuspecting third party, such as a financial advisor, to incur accessory liability. In this day and age that is simply not acceptable.


Many jurisdictions have adopted the FATF’s 40+9 recommendations into their national anti-money laundering legislation (or even created specific new piece of legislation), and either approach is generally acceptable to the FATF. However, it is quite surprising that some jurisdictions have not fully implemented FATF’s recommendations and one particular case in point has been the applicability to lawyers.


The European Union has acted on the concerns highlighted by the FATF by enacting a specific directive, which imposes AML obligations, such as reporting on suspicious transactions, client due diligence checks, record keeping and international co-operation on legal professionals, assisting in the planning or execution of client transactions, including property transactions, the management of client money or other assets and the creation of companies and trusts.


The FATF has always been sensitive to the positions that lawyers often hold. In their 2019 Guidance Paper, the FATF recognised that legal professionals operate within a broad spectrum of business structures that can vary from country to country and even within a country. Lawyers act as sole practitioners to multinational firms, and they may provide niche bespoke services or a vast range of services.


The FATF recognises that this diversity in scale and activities may make legal professionals more vulnerable to being exploited for ML and terrorist financing (TF) than others. Hence, as in other cases or professions, the FATF has suggested a risk-based approach (RBA) for legal professionals. The RBA aims to support legal professionals in the design of effective measures to manage their ML/TF risks, when establishing or maintaining business relationships.


Despite what may appear to be a watering down of standards, the FATF still firmly advocates the obligation for legal professionals to identify and verify beneficial ownership information and to perform simplified, standard, and enhanced Customer Due Diligence (CDD) measures as required.


The guidance also contains a section for supervisors of legal professionals. The guidance specifically highlights the importance of supervision of beneficial ownership requirements and nominee arrangements so that up-to-date information on legal persons and legal arrangements is maintained and available in a timely manner.


This RBA approach is, however, non-binding and there are still some within the global legal profession who object to taking on such obligations. This is extremely baffling as lawyers are, in many cases, at the forefront of the global battle against money laundering and other forms of financial crime.


The US is still unwilling to dilute legal professional privilege as fundamental to the lawyer-client relationship. Therefore the US is seen as disinclined towards modifying its current AML legislation to include professionals such as lawyers. This puts US lawyers in danger of being seen, within the global arena, as involuntary facilitators to the money laundering activities of their clients. They are not being gatekeepers.


Australia has only just agreed to an enhanced RBA approach for the legal industry (after many years of promises and inexplicable foot dragging), but the actual regulations are yet to be enacted.


There is also concern amongst some jurisdictions of the creation of a potential anomaly within the legal profession, with many cross-border international law firms finding themselves subject to unfamiliar and uncertain money laundering requirements as a result. But surely an international law firm should have the resources and the expertise to become educated on its obligations regardless of the location of their offices?


Taiwan’s approach

Taiwan has a robust ML/TF regime which also covers the legal profession. Taiwan’s Ministry of Justice (MOJ) has issued regulations on Anti-Money Laundering & Countering the Financing of Terrorism Operations Matters Conducted by Attorneys (which was amended in October 2021).

The MOJ’s regulations for lawyers practicing in Taiwan are well drafted and comprehensive. Some 19 articles cover the full spectrum an FATF style of RBA towards ML and TF.


The articles discuss the conduct of CDD and even Enhanced Due Diligence (EDD) procedures to verify the identity of the client and the retention of documentation.


The MOJ’s RBA requires Taiwan’s lawyers to understand the background of the client, types of transactions, transaction amount and direct source or destination of funds. Importantly, the MOJ is also interested in the direct source or destination of funds of client which come from high-risk countries or territories and are assessed as high-risk.


Reference is made to politically exposed persons (PEPs) and their family members and close associates, which seems to imply that these clients should be subject to a higher EDD standard, which is in line with international standards.


The MOJ regulations also provide for the equivalent of suspicious activity or suspicious transaction reports within five working days after the lawyer or law firm identifies a relevant suspicious fact.


In a further example of best practice, there is a requirement to assess ML/TF risks before commencing new business, and corresponding risk management measures to mitigate the risks must be identified and implemented. New business includes new payment mechanisms and the use of new technology for new or existing business.


The leading lawyer or the managing lawyer must also encourage the lawyers, including any foreign lawyer of his/her firm, to participate in on-the-job training for AML/CFT organised by an individual bar association, government agency, legal person or entity.


The MOJ regulations also call for the establishment of an appropriately sized audit system within the law firm and this audit system must conduct self-censorship or an internal audit with written records on an annual basis.


The MOJ will also conduct risk-based supervision, and mandates itself (or entrusts the bar association) to conduct on-site or off-site audits every two years. All in all, a very compact and concise programme as expected.


Most financial institutions (and this includes those in Taiwan) rely on advanced search, monitoring and tracking systems when dealing with their clients. This may be seen as overkill for law firms but, since we operate in a geopolitical environment where sanctions against individuals, companies and even countries are becoming the norm, it raises the question as to how law firms (not just in Taiwan, but globally) should cope with this increased need for scrutiny. Perhaps this could offer a niche opportunity for some savvy FinTech companies.


Most of the larger Taiwan law firms deal with multinational corporations, High Net Worth Individuals (HNWI’s), and other global law firms. There may be some work from SMEs or normal individuals, but the larger firms do not see much of this smaller business flow.


The larger firms see requests for advice on employment, corporate and intellectual property laws in which there is no flow of money.


Apparently, requests for money transactions are also quite low but the firms do need to ensure that there are rational and justifiable reasons for some of these.


Firms do acknowledge the MOJ’s requirement to investigate any suspicious transaction whilst also recognising that some of their clients may come from high-risk jurisdictions. In line with the MOJ regulations the firms do engage in on-boarding, KYC, CDD and even EDD reviews of new and existing clients as much as to ensure their fees for advice rendered are paid.


However, law firms also assert that there can be quite valid reasons for the movement of large sums of money for reasons other than tax-evasion, fraud, or financial crime (just like the activities of financial institutions and their clients). Personal and/or family privacy come to mind in these areas, and this is where HNWIs may need extra care from law firms.


So, it seems that larger firms are definitely making efforts to follow the MOJ regulations. The efforts of smaller firms may be less evident, and they may find the procedures burdensome. At the same time, there appears to be no recent public evidence of the MOJ censuring a local law firm in relation to ML/TF or other financial crime activities.


On balance then, Taiwan’s law firms do seem to understand their role as gatekeepers. The MOJ is certain to ensure that that understanding continues.


Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.

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