FATF guidance for legal professionals

The Financial Action Task Force (FATF) has produced risk-based approach (RBA) guidance to help legal professionals design effective measures to manage money laundering and terrorist financing risks.  The guidance is also aimed at supervisors of legal professionals, highlighting the importance of supervising the RBA.

The FATF developed this non-binding guidance with input from the legal profession, including through a public consultation in March 2019. This guidance replaces the 2008 version.

Download the guidance

The Federation of Law Societies of Canada working with government in the fight against money laundering and terrorist financing

The regulators of the legal profession in Canada and the Canadian government have embarked on a new chapter in the fight against money laundering and the financing of terrorist activities. Late last Spring Canada’s Minister of Finance announced the creation of a joint working group comprised of representatives of the government and the Federation of Law Societies of Canada. The working group, which held its first meeting at the end of June 2019, is intended as forum to explore issues related to money laundering and terrorist financing that may arise in legal practice and to strengthen information sharing between the regulators of the legal profession and the government of Canada. The group, co-chaired by an official of the Department of Finance and the Federation’s Executive Director of Policy and Public Affairs, will meet quarterly.

The creation of the joint working group follows a decade-long legal battle in which the Federation argued that attempts to subject members of the legal profession to the government’s AML regime interfered with solicitor-client privilege and the duties owed by legal counsel to their clients. A February 2015 decision from the Supreme Court of Canada upheld the Federation’s arguments finding that as applied to members of the legal profession, the AML regime was unconstitutional.

Canada’s legal regulators have engaged for many years in regulating the risks of money laundering and terrorism financing in the practice of law. Two model rules, aimed at limiting the handling of cash by members of the legal profession and ensuring legal counsel engage in due diligence in identifying their clients, have been the cornerstone of the regulators’ anti-money laundering and anti-terrorism financing initiatives. The Cash Transactions Rule was adopted in 2004, and the Client Identification and Verification Model Rule was adopted in 2008. Both were implemented by all Canadian law societies. Those rules were updated with amendments adopted by the Federation in late 2018. A new Model Trust Accounting Rule that restricts the use of the trust accounts of members of the legal profession as part of the law society regulations aimed at fighting money laundering and terrorist financing was adopted at the same time.

In the years following the court victory, the Federation encouraged the government to recognize the regulatory initiatives of the Law Societies and to see the regulators as partners in the fight against money laundering in Canada. Faced with criticism from the Financial Action Task Force over the exclusion of legal counsel from the legislative AML regime, the government was initially focused on the suggestion in the Supreme Court’s decision that it might be possible to develop constitutionally-compliant AML regulations governing members of the legal profession. The new joint working group and the discussions leading to its creation mark a significant shift in the government’s approach to this issue. The government has made it clear that it is interested in working closely with the Federation and the law societies on the anti-money laundering file indicating an understanding of the unique position of the legal profession and the duties that members of the profession owe to their clients.

It is expected that officials from Canada’s financial intelligence agency (FINTRAC) and federal law enforcement agencies will join representatives of the Federation and the Canadian departments of Finance and Justice on the joint working group. The next meeting of the working group is scheduled for November 2019.

Author: Frederica Wilson
Executive Director, Policy and Public Affairs and Deputy CEO, Federation of Law Societies of Canada

Anti-Money Laundering and Lawyer Regulation: The Response of the Professions

Abstract

The extension of anti-money laundering (AML) controls to lawyers has been a controversial topic since the early 2000s. The legal professions facing these measures have adopted differentiated strategies of response, three examples of which are examined and contrasted in this paper. In the US, the legal profession vocally objected to the measures and has been able to deflect any legislative action. In the United Kingdom, the profession pragmatically engaged with the new rules, while in France the profession has made maximum use of the levers of self-regulation allowed by the European directives. The paper presents AML lawyer-regulation as an example of the versatility of global regulatory norms, which do not necessarily evict national traditions. It also views the EU as the real bedrock of AML regulatory diffusion and questions US professional (and academic) resistance to these norms.

Citation:

Nougayrède, Delphine, Anti-Money Laundering and Lawyer Regulation: The Response of the Professions (June 15, 2019). Available at SSRN.

The FATF FinTech and RegTech initiative

At the end of February 2018, the Financial Action Task Force (FATF) launched the new FATF FinTech & RegTech initiative platform, to share information about national initiatives and developments relevant to FinTech and RegTech. The FATF policy is to strongly support responsible financial innovation in line with the FATF Standards to tackle money laundering and terrorist financing, and exploration of opportunities that new financial and regulatory technologies present for improving the effective implementation of AML/CFT measures.

Engagement with the FinTech and RegTech Community is one of the priorities for the FATF.  FATF has organised a number of roundtables, meetings and fora involving representatives from this community, to develop a constructive dialogue.  Whilst only in its infancy, it is intended that the FinTech/RegTech platform will become a repository of information relating to the topic, highlight useful innovations and will encourage dialogue between the relevant government departments, regulators and private sector actors.  There may be some interesting approaches and lessons to learn for legal regulators from this initiative.

If you are interested in finding out more contact the team working on FinTech and RegTech at the FATF Secretariat: fintech@fatf-gafi.org

 

SRA publishes the findings of its money laundering review

The SRA’s review of 50 firms has shown that although most law firms are doing what is needed to tackle money laundering, some need to do more.

The review of firms – large and small – explored the profession’s compliance with the more stringent demands of the Money Laundering Regulations 20171, introduced last June.

It also found most were taking appropriate steps to understand and reduce the risk of money laundering. This included doing appropriate customer due diligence, using a variety of ways to establish the source of a client’s funds and wealth, and good training processes.

Yet there were areas of concern. Not all firms were keeping records of their decisions and only 69 percent of files reviewed had written evidence that the level of risk was assessed. Despite being a requirement, only a third – 17 firms – had a firm-wide risk assessment in place or were in the process of implementing one. At the time of the review firms had only had limited time to implement the new regulations, but the SRA expects firms to move towards compliance as a matter of urgency.

There were serious concerns about the processes and practices of six firms reviewed. They are now in ongoing disciplinary processes.

More broadly, in the last three years in cases linked to potential improper money movements2, the SRA has closed-down eight firms, with another 14 closing down voluntarily, and has referred 49 solicitors and two other firms to the Solicitors Disciplinary Tribunal. This has resulted in 12 strike offs, 13 suspensions and fines of more than £800,000.

As a result of these findings, the SRA has issued a warning notice further highlighting potential indicators of money laundering or criminal activity. It warns firms to remain vigilant and look out for signs such as overly secretive clients, high value cash transactions and clients acting through third parties. Firms should report suspicious activity.

To help firms better protect themselves, the SRA has also issued guidance highlighting key changes in the regulations. These include the need to have records of all staff training, a Money Laundering Compliance Officer (MLCO) on the board of directors, and to identify domestic, as well as foreign, politically exposed persons.

This guidance is complemented by a sectoral risk assessment, which identifies the five main risk areas, such as types of clients, legal services and transaction.

The National Crime Agency has said that money laundering is likely to cost the UK more than £24 billion a year, and is a major source of financing for criminal activity.

“The credibility of law firms makes them an obvious target for criminals wishing to launder money. Tackling it is crucial not only to maintain trust in the profession, but also for the good of society. Money laundering is not a victimless crime – it helps fund terrorism and those involved in drug trafficking and people smuggling.

“We are encouraged that most firms seem to be on top of the issues, but all firms in scope must now comply with the new regulations. It is not enough to want to do the right thing. Weak processes or undertrained staff leave the door open for criminals. If firms do not step up and treat this issue with the seriousness it deserves, we will take action.”

Paul Philip, SRA Chief Executive

1. The Money Laundering, Terrorist Financial and Transfer of Funds (Information on the Payer) Regulations 2017 came into effect in June 2017. The regulations apply to around two-thirds (around 6,700) of law firms the SRA regulates in England and Wales. These provide services that are most likely targeted by those wishing to launder money.

2. Note these cases do not necessarily involve evidence of actual money laundering. our rules and money laundering are preventative and can be breached without there being evidence of actual laundering.

The Federation of Law Societies of Canada: AML update

The Federation of Law Societies of Canada (the “Federation”) is in the midst of a consultation with its members, the 14 provincial and territorial regulators of the legal profession, on proposed amendments to the Model Rules that have formed the cornerstone of the law societies’ fight against money laundering and the financing of terrorist activities for more than a decade. The amendments, and a proposed new rule that would tie the use of lawyer trust accounts to the provision of legal services, are intended to ensure that the law societies’ anti-money laundering and anti-terrorism financing regulations are as robust and effective as possible.

As a result of litigation between the Federation and the Canadian government, federal anti-money laundering and terrorism financing legislation and regulations do not apply to members of the legal profession. Acknowledging the importance of combatting these illegal activities, the regulators have been at the forefront of the fight against money laundering and the financing of terrorism since adoption in 2004 of the No Cash Rule. Intended as substitute for the suspicious transaction reporting requirements in the federal Proceeds of Crime (Money-laundering) and Terrorist Financing Act that the Federation challenged in court, the No-Cash Rule prohibits members of the profession from accepting more than $7,500 in cash. A second Model Rule, the Client Identification and Verification Rule, was adopted in 2008 and contains most of the same requirements that are in the federal government’s corresponding regulations.  These Model Rules have been adopted and implemented by all law societies as part of regulatory initiatives that are in keeping with important constitutional principles, as affirmed by the Supreme Court of Canada.

Fighting the threat that members of the legal profession will be used to launder money or finance terrorist activities remains a strategic priority for the Federation and its members. Recognizing that the Model Rules had not been reviewed since first adopted, in late 2016 the Federation established a special working group to undertake a full examination of the rules. The Anti-Money Laundering and Terrorist Financing Working Group (the “Working Group”) is also developing best practices guidance on ensuring compliance with and enforcement of the rules. The development of comprehensive educational materials for the legal profession is also underway.

The proposed amendments to the Model Rules would clarify some aspects of the rules and would also impose new obligations, including a requirement to obtain information on beneficial owners of an organization. This proposed change would address a specific criticism of the law society anti-money laundering and terrorist financing rules that has been raised by the Canadian government and the Financial Action Task Force. As there is not currently a robust corporate registry system for beneficial ownership information at either the federal or provincial levels in Canada, the Working Group recognized that compliance with this amendment may prove difficult in some cases. To address this possibility the draft amendments prescribe additional measures that must be taken when the required information cannot be obtained.

A proposed new rule would prohibit legal counsel from depositing client funds into their trust accounts except where directly related to a matter for which the lawyer or firm is providing legal services.  The Working Group is of the view that by restricting use of trust accounts, the rule, which is modeled on rules in force in several Canadian jurisdictions, would assist in reducing the risk of lawyers’ trust accounts being used for purposes related to money laundering or the financing of terrorist activities.

The consultation on the amendments and new rule will continue through March 15, 2018. It is anticipated that final amendments will be approved before the summer and will then be referred to the law societies for implementation.

As the Federation’s consultation is wrapping up the Canadian government has launched a mandated review of its anti-money laundering legislation.  Although government representatives have suggested on a number of occasions that the government will try again to bring legal counsel within the scope of the federal anti-money laundering and anti-terrorism financing regime, a government lawyer testifying at recent hearings being held as part of the review acknowledged that this may not be possible. Referring to the 2015 decision of the Supreme Court of Canada that found the application of the legislation to legal counsel was unconstitutional, the lawyer said   “It won’t be easy. If you read this case, you will realize there is very little latitude to require information from lawyers, or to impose a requirement with respect to the submission of client information.”

Link to full consultation report

Article contributed by Frederica Wilson, Executive Director, Policy and Public Affairs and Deputy CEO, Federation of Law Societies of Canada

ICLR 2017 – Panel: Anti-money laundering and Counter-Financing of Terrorism

A synopsis of panel session 2, which takes place on 5 October at ICLR Singapore, kindly provided by the session’s moderator, Ellyn S. Rosen – Regulation and Global Initiatives Counsel, American Bar Association Center for Professional Responsibility.  Conference materials will be made available to ICLR.net members after the conference.

During the first day of the Conference, this panel will focus on terrorist finance and anti-money laundering (AML) issues facing regulators of the legal profession.  Moderator Ellyn Rosen, Regulation and Global Initiatives Counsel at the ABA Center for Professional Responsibility will be joined by Dr. Heike Lörcher, Head of Office from the German Federal Bar; Crispin Passmore, Executive Director for Policy at the Solicitors Regulation Authority; Deborah Armour, Chief Legal Officer at the Law Society of British Columbia; and Surenthiraraj s/o Saunthararajah, a partner with Eversheds Harry Elias LLP in Singapore.

In its mutual evaluation reports, the Financial Action Task Force (FATF) has raised concerns in the U.S., Canada, Europe, the U.K., and elsewhere that the legal profession, regulators in particular, are not doing enough to prevent money-laundering or terrorist financing or to prosecute lawyers for their participation in it.  Instead, the FATF has intimated, the profession is enabling such behavior, in part through lack of effective regulation.  Notable is the lack of hard data in the mutual evaluation reports to support such allegations.  This panel provides an optimal forum for regulators to discuss this topic, including where there exist commonalities in pressures on regulators by the FATF, the extent to which complaints about these issues are coming to regulators’ attention (including from other government agencies), and what role regulators can and should take in better educating themselves and the profession about AML. The discussion will also focus on what the international lawyer regulator community can do, collectively, to put ourselves in a stronger position collectively with regard to communicating with and addressing concerns of the FATF.