Mandatory Obligations to the State

The privileged position of the legal profession is a gift of the state which has always incurred special obligations. The earliest surviving collective obligation is the duty to the court.

A. Duty to the Court

The duty to the court was traditionally owed by advocates.³⁰ According to Lord Justice Brooke in Copeland v Smith³ the justice system of England and Wales ‘has always been dependent on the quality of the assistance that advocates give to the bench’. It was also said that this permits the state to avoid ‘having to incur the cost of legal assistance for judges’.³² Clients therefore pay their lawyers to inform the state about its own laws.

The duty to the court is not an unduly onerous burden for the profession. Lord Justice Brooke said that the need to keep up to date encompassed only the material to be found in generalist law reports, such as the Weekly or All England Reports, and not specialist reports. Whether the comment is still valid must be open to question in the light of current sophisticated legal search engines and websites available.

B. Reporting on the Use and Laundering of Proceeds of Crime

In efforts to control crime the state has introduced a number of offences that attempt to disrupt serious crime, including terrorism, by limiting the movement of proceeds

²⁹ SRA, Handbook 2011; SRA Principles 2011, as amended, Principle 6.

³⁰ See further ch 19: ‘Advocacy’.

³¹ Copeland v Smith [2000] 1 All ER 457.

³² ibid, at 462-63.

of crime. These offences involve dealing with, and being party to arrangements involving, proceeds of crime. Solicitors, and others, are required by law to disclose suspected activities to the relevant authorities. One of the main activities targeted by the legislation is money-laundering.

i. Scope of Offences

Money laundering was originally described by the Law Society as the process by which ‘dirty money’, the proceeds of crime, is handled so that the money appears ‘to originate from a legitimate source’.^[2180] Concern that sophisticated criminal clients could use lawyers, and abuse the rules on confidentiality and legal privilege, to laun­der the proceeds of crime, proved well founded. An infamous example is of Michael Renton, a partner in a South London criminal practice, who was convicted of laun­dering some of the thirty million pounds stolen in the Brinks Mat gold bullion rob­bery. Overseas accounts were used to launder the money and produce profits from property transactions.^[2181]

Money laundering is an international problem. The European Council Directive 91/308/EEC^[2182] requires disclosure of suspicious transactions by credit and financial institutions throughout the European Union. The requirement for lawyers to break client confidentiality was challenged under Article 6 of the European Convention on Human Rights by the bars in Belgium, France and Poland.^[2183] The original UK legis­lation in the UK was the Criminal Justice Act 198 8,^[2184] the Drug Trafficking Offences Act 1994 and the Prevention of Terrorism (Temporary Provisions) Act 1989. The current provisions are contained in the amended Proceeds of Crime Act 2002 and its associated Money Laundering Regulations 2007, which came into force at the end of 2007.

The Proceeds of Crime Act 2002 and the Terrorism Act 2000, as amended,^[2185] apply to all solicitors and other professionals. New Money Laundering Regulations^[2186] were enacted in response to an EU Directive.^[2187] These apply to solicitors’ activities where there is a high risk of money laundering.

a. Disclosure

The main purpose of the legislation on proceeds of crime is to secure disclosure of suspected activity to the relevant authorities. For example, a person commits an offence of failing to disclose money laundering if three conditions are satisfied.^[2189] The first condition is that the person knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering. The sec­ond condition is that the information giving rise to the knowledge or suspicion came to him in the course of a business in the regulated sector.

The regime covers all persons, but the main offences relate to ‘business in the regulated sector’. This covers a wide range of financial activity.^[2190] including holding property on trust, holding documents of title, managing and advising on investments, all activities undertaken by most solicitors and those authorised by the Financial Conduct Authority to undertake investment business. The third condition is that he does not make the required disclosure as soon as is practicable. This was originally to a nominated officer or a person authorised by the Director General of the National Criminal Intelligence Service (NCIS), later merged with the Serious Organised Crime Agency (SOCA) in 2006.

The Proceeds of Crime Act 2002 makes provision, under section 337, for what are known as ‘protected disclosures’. Such a disclosure is ‘not to be taken to breach any restriction on the disclosure of information (however imposed)’.^[2191] This means that solicitors who make disclosures in relation to clients are not regarded as having acted in breach of the rules relating to privilege or confidentiality. They cannot be subjected to disciplinary proceedings. Nor will they be in breach of contract and cannot be suc­cessfully sued by the client.

The circumstances for protected disclosures are that the information or other mat­ter disclosed came to the discloser in the course of his trade, profession, business or employment. The information or other matter will have caused the discloser to know or suspect, or given reasonable grounds for knowing or suspecting, that another person was engaged in money laundering. The disclosure must then be made to a constable, a customs officer or a nominated officer as soon as is practicable.^[2192]

Solicitors can offer the defence of legal professional privilege to the offence of fail­ure to disclose suspected money laundering. Section 330(6) provides that an offence is not committed if there is a reasonable excuse for not disclosing the information. Alternatively, they may claim that they are a professional legal adviser and the infor­mation or other material came to them in privileged circumstances.

The defence is set out in section 330(10) of the Proceeds of Crime Act. It is defined in a similar way to the defence in the Police and Criminal Evidence Act. Circumstances are privileged if the information is communicated to or given to the legal adviser by a client of his in connection with the giving by the adviser of legal advice to the client, or by a person seeking legal advice from the adviser, or by a person in connection with legal proceedings or contemplated legal proceedings. This defence, however, is not available if the information was given to a solicitor with the intention of furthering a criminal purpose.^[2193]

b. Tipping off and Prejudicing an Investigation

Solicitors considering reporting a suspicion of money laundering must not inform the client. This is at the risk of committing further offences. These offences can only be committed once the solicitor knows or suspects the money laundering disclosure has been made. ‘Tipping off’ is committed by a person in the regulated sector disclosing to a third person that a suspicious activity report has been made or that an money laun­dering investigation is underway.^[2194] A broader class of people can commit an offence by prejudicing a confiscation, civil recovery or money laundering investigation.^[2195] Therefore a solicitor should be very careful before warning a client, or any other person, that money laundering is suspected.

c. Dealing with Criminal Property

Under the Proceeds of Crime Act 2002, section 329, a person commits an offence if he acquires criminal property, uses criminal property or has possession of criminal property. Under section 327, a person commits an offence if he conceals, disguises, converts, transfers criminal property or removes it from England and Wales, Scotland or Northern Ireland. Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it.^[2196]

Offences are not committed under either section in a number of circumstances. First, there is no offence if such a person makes an authorised disclosure under sec­tion 338 and obtains the appropriate consent. Secondly, there is no offence if they intended to make such a disclosure, but had a reasonable excuse for not doing so. Thirdly, there is no offence if they perform a forbidden act in carrying out a function relating to the enforcement of the Act or any similar provision.^[2197]

d. Becoming Concerned in an Arrangement

Under the Proceeds of Crime Act 2002, section 328, it is a criminal offence for a person, including a solicitor, to enter into or become concerned ‘in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person’.^[2198] Criminal property is broadly defined in the 2002 Act as a benefit obtained from criminal conduct.^[2199] Criminal conduct includes any offence in the UK, or conduct that would be an offence in the UK if it had occurred there.

As with section 327, offences are not committed under section 328 where a person makes an authorised disclosure under section 338 and obtains the appropriate con­sent.

e. Interpretation of the Offences and Defences

It is of considerable practical importance to lawyers undertaking any, apparently normal, legal transaction to consider the possibility that they are party to illegality. Therefore, if a solicitor knows or suspects that a client is buying a house with money that originated from a criminal offence, but does the conveyancing, he or she will be guilty of the offence. In one such case, a solicitor sold a house at an undervalue for an estate agent he ‘trusted’.^[2201] The house was owned by drug traffickers and the solicitor was jailed for six months. He claimed he was only guilty of an error of judgement but the Court of Appeal upheld the conviction, stating that ‘society demands a high degree of professionalism from solicitors’.

A first decision under the Proceeds of Crime Act 2002 suggested that solicitors could easily become concerned with an ‘arrangement’ relating to ‘criminal property’ in the course of litigation. P v P involved a relatively minor case of tax evasion.^[2202] The solicitor on the other side was concerned that he was bound to report his suspicion under money laundering reporting requirements. This caused considerable consterna­tion in the legal profession. A subsequent Court of Appeal case, Bowman v Fels,^[2203] restored some equilibrium. Bowman was a case on the ownership of the home on relationship breakdown. The female claimant was asserting an equitable interest in the former home of herself and her male partner. Her solicitor suspected that the defendant had included the costs of renovating his home in his business account and VAT returns. He reported this suspicion of criminal activity to the National Criminal Intelligence Service (NCIS) under section 328.

The Court of Appeal noted that the UK Government had enacted legislation that potentially went further than the EU Directive in requiring suspicions to be disclosed. The consequence for civil proceedings was the possibility of considerable disruption while any reported suspicions were considered. The court heard that, even though in 75 per cent of cases consent to proceed with the case was given in 24 hours, the NCIS could have up to five weeks to respond.

In the event, it was held that the ordinary conduct of litigation was not covered by section 328. Brooke LJ, delivering the judgment of the Court of Appeal, said

Parliament cannot have intended that proceedings or steps taken by lawyers in order to determine or secure legal rights and remedies for their clients should involve them in ‘becoming concerned in an arrangement which... facilitates the acquisition, retention, use or control of criminal prop­erty’, even if they suspected that the outcome of such proceedings might have such an effect.^[2204]

Any other decision, said the Court, would introduce the risk of unacceptable delay into all proceedings, prejudicing the right to a fair trial under Article 6 of the European Convention on Human Rights.

Following the case, the Law Society published guidance based on the assumption that a Bowman v Fels exemption from section 328 covered the final division of assets in accordance with a judgment or settlement, including the actual handling of the assets. The property itself is still, however, ‘criminal property’ and future dealings with it may require a report to SOCA.^[2205] It is not clear whether any exemption covers mediation or other processes ancillary to court proceedings.^[2206]

f. Ethical Issues

Sceptics may feel that this legislation gives solicitors the best of both worlds. Failure to disclose may be justified by legal professional privilege, but clients cannot complain about disclosure. Solicitors may, however, have an uncomfortable conflict of interest and a genuine ethical dilemma in such cases. It is arguable that, since no offence is committed where privileged circumstances exist, they should not disclose suspicions of money laundering when they are not obliged to do so. After all, if the general law does not require disclosure, the expectation that privilege applies should prevail. Arguably, they should risk possible criminal prosecution and act in the best interests of their client by refusing to disclose.

If they do decide to ‘shop’ their client, a further issue is whether a solicitor con­tinues to represent that client. In ordinary circumstances this would justify the with­drawal of the solicitor from the case, but this is not possible because of the certainty of committing a tipping off offence. The tipping off requirements involve such a fundamental breach of loyalty and confidence that lawyer and client relationship is irrevocably undermined. This is a clear and irreconcilable conflict of interest between client and solicitor. In some circumstances, as in Bowman v Fels, solicitors might be stalling proceedings waiting for consent from SOCA to continue. They cannot say anything to the client. In due course, the client is likely to sack the solicitor anyway.

g. Money Laundering Regulations 2007

The Money Laundering Regulations 2007 implemented the Third European Money Laundering Directive requiring increased requirements on those responsible for reporting suspected money laundering.^[2207] The Law Society resisted the imposition of obligations on solicitors to investigate persons having beneficial ownership of property, under trusts and the like, on the grounds that the provisions were vague and costly to carry out. Some positive response by the government to lobbying was achieved. The Law Society also succeeded in excluding non-regulated solicitors from the tipping off criminal penalties.^[2208] Nevertheless, similar, and often wider, rules were introduced throughout Europe and the USA.^[2209] The regulations apply to a wide range of business in a more broadly defined regulated sector.^[2210] The regulations cover ‘rel­evant persons’, including ‘independent legal professionals’, firms or sole practitioners providing legal services to participants, for example, in financial or real property transactions, managing client money or creating trusts.^[2211]

The regulations require solicitors to ensure that their firm’s employees are trained to recognise and handle suspicious transactions. This includes ensuring that client’s identities, and those of certain beneficiaries of trusts, are adequately checked. Internal reporting procedures must be set up to maintain records of transactions for five years. Staff must be adequately trained in the law relating to money laundering and terrorism.^[2212] This enables an audit trail of transactions to be followed. The regulatory authorities have extensive supervisory and inspection powers and can also resort to various civil and criminal penalties for failure to adhere to the regulations.

The requirement that firms verify a client’s identity before proceeding with any financial transaction^[2213] applies even to what may appear to be mundane transactions. Even a domestic house purchase is subject to standard due diligence, verification of identity using ‘documentation, data or information obtained from a reliable and independent source’.^[2214] The obligations imposed on legal employers to detect money laundering are stringent. They render excuses based on lack of knowledge or staff failings, with which solicitors escaped responsibility in the early days of the regime,^[2215] increasingly unsustainable.

h. Sanctions

The maximum penalty for money laundering is 14 years’ imprisonment. Various fac­tors influence severity of sentence including the amount of money involved, number of transactions and the connection to drugs. Civil or criminal confiscation proceedings can be used to recover the proceeds of criminal activity. Someone involved in money laundering might also be convicted for contempt of court. In one case an advocate received a 15-month prison sentence for falsely representing that a £1 million pay­ment from his father, a convicted money launderer, was for legal services.^[2216] Lawyers can also be subject to disciplinary proceedings, with striking off or disbarment a likely outcome.

C. Preventing Terrorism

There are various measures designed to suppress terrorism,^[2217] but the main provisions are in the Terrorism Act 2000 (as amended). The Act criminalises participation in ter­rorist activities and the provision of monetary support for terrorists. The Act creates general offences that apply to lawyers, as well as others subject to UK law, and some that apply to the regulated sector, which includes many lawyers.

i. General Criminal Offences of Dealing with Property Intended

for Use in Terrorism

The principal terrorist property offences in sections15-18 apply to all persons and therefore to all lawyers. Additionally, lawyers, by operating in the regulated sector, can commit further offences based on failing to report knowledge or suspicions that the primary offences have been committed.

The first offence is for people to be involved in raising funds that they know or have reasonable cause to suspect may be used for terrorist purposes.^[2218] The offence can be committed by inviting, receiving and making financial or other contributions that could be used in this way. It is no defence that the money or other property is a pay­ment for goods and services. The second offence is using or possessing money or other property for terrorist purposes, including when there is reasonable cause to suspect such use.^[2219] The third property offence under the Terrorism Act is becoming involved in an arrangement which makes money or other property available to another when it is known, or reasonably suspected, that it may be used for terrorist purposes.^[2220]

The final offence covers money laundering. It is an offence to enter into or become concerned in an arrangement facilitating the retention or control of terrorist property by, or on behalf of, another person.^[2221] This includes concealing property, removing it from the jurisdiction or transferring it to nominees. It is a defence that a person did not know, and had no reasonable cause to suspect, that the arrangement related to terrorist property.

The Terrorism Act 2000 provided a number of general defences based on disclosure to and co-operation with authorities. Therefore, it is a defence for a person involved in a transaction or arrangement relating to money, or other property covered by the Act, to act with the consent of a constable or to disclose his suspicion, and the information on which it is based, to a constable.^[2222] It is also a defence where a person is in employment, and the employer has established a procedure for making disclosures, that disclosure is made under the procedure.^[2223]

The Terrorism Act Regulations 2007 (TACT Regulations 2007) introduced three new defences to the property offences.^[2224] The first was that the relevant person had made a disclosure to an authorised person before becoming involved in a transaction or an arrangement, following which, the person acts with the consent of an authorised officer. The second was where such a person was already involved in a transaction or arrangement and made a disclosure, provided there was a reasonable excuse for failure to make a disclosure in advance. The third defence was that the person intended to make a disclosure but had a reasonable excuse for failing to do so.

ii. Offences Relating only to the Regulated Sector

The regulated sector definition is similar to that used for the Proceeds of Crime Act 2002. The sector covers a wide range of activity, much of it involving lawyers in one way or another.^[2225] The main offence is failing to disclose. This was expanded by the TACT Regulations 2007 to cover failure to disclose an attempted offence under sections 15-18. There are two tipping off offences, applying only to persons in the regulated sector.

a. Failing to Disclose

Under the Terrorism Act 2000, section 21A a non-disclosure offence is committed if three conditions are satisfied. The first condition is that the person knows or suspects, or has reasonable grounds for knowing or suspecting, that another person has com­mitted or attempted to commit an offence under any of sections 15-18. The second condition is that the information or other matter on which his knowledge or suspicion is based, or which gives reasonable grounds for such knowledge or suspicion, came to the recipient in the course of a business in the regulated sector. The third condition is that the person does not disclose the information or other matter to a constable, or a nominated officer, as soon as is practicable after it comes to him^[2226] or to an authorised member of staff of the Serious Organised Crime Agency.^[2227]

The section goes on to state that a person does not commit an offence if he has a reasonable excuse for not disclosing the information or other matter.^[2228] A lawyer has a defence if information came to him in privileged circumstances. Someone employed by a law firm to assist and support lawyers who receives privileged information can also claim such a defence.^[2229] This is defined, in the same way as for money laundering, as giving legal advice to a client or by a person in connection with legal proceedings or contemplated legal proceedings.^[2230] The defence is not available where the information is given with a view to furthering a criminal purpose.^[2231]

It is a defence for lawyers in firms with a reporting system to make a timely report of suspected activity. In deciding whether someone has committed an offence under section 21A, a court must consider whether he followed any relevant guidance issued, inter alia, by a supervisory authority or any other appropriate body.^[2232] This is defined to include a body regulating or representative of a profession, business or employment carried on by the alleged offender.^[2233] The Act provides that protected disclosures are not regarded as breaching any restriction on revealing information, ‘however imposed’.^[2234]

b. Tipping off

The first tipping off offence relates to information that came to a person in the course of a business in the regulated sector. It relates to any disclosure that might prejudice investigations that might be carried out. It is an offence for a person to disclose to a third person that a report of such information has been made by any person to the police, HM Revenue and Customs, SOCA or a nominated officer.^[2235] The second offence is disclosing that an investigation into allegations relating to terrorist property offences is being contemplated or carried out, if that disclosure is likely to prejudice an investigation.^[2236] Again, the offence requires that the information disclosed came to the person in the course of business in the regulated sector.

A tipping off offence is not committed if a lawyer shares information with an employee, officer or partner of the same undertaking, including undertakings in common ownership, management or control.^[2237] Nor is such an offence committed in a number of other circumstances. The most relevant are where information is shared for the purpose of preventing a money laundering offence or where both parties have equivalent professional duties of confidentiality and protection of personal data.^[2238] Most significantly, a tipping off offence is not committed if the disclosure is part of an attempt to dissuade a client from engaging in conduct amounting to an offence.^[2239]

iii. Regulation

The SRA Handbook contains an outcome requiring compliance with ‘with legislation applicable to your business, including anti-money laundering and data protection legislation’.^[2240]

iv. Ethical Implications

As with the money laundering regime, anti-terrorism legislation undermines the foun­dation of a lawyer and client relationship based on loyalty and trust. When a lawyer begins to be suspicious about a client’s motives and intentions, they can no longer be concerned for the client’s best interests. They are immediately put in a position where they must probe for information, so as to confirm their suspicion, but without letting the client know what is happening. One of the concessions that the legislation makes to lawyers is that it is a defence to tipping off when an attempt is made to dissuade the client from an offence. This would need to be combined with a timely report if commission of the primary offence, failing to report, is to be avoided.

D. Disclosing Details of Tax Avoidance Schemes

Under the Finance Act 2004, the promoters and users of certain types of tax avoid­ance schemes are required to disclose details to Her Majesty’s Revenue & Customs (HMRC). Under section 306, these ‘notifiable arrangements’ are those that ‘enable, or might be expected to enable, any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description’.^[2241] This refers to schemes for tax avoidance, not routine tax advice.

The aim of the measures is to allow HMRC to obtain advance warning of new tax schemes being promoted by the financial services industry. The authorities can then attempt to circumvent them in advance by new regulations or litigation. The duty of disclosure is imposed on the promoters of the schemes, which includes anyone whose business or profession involves offering tax services and who designs or pro­motes a notifiable tax scheme. A wide range of professionals are likely to be caught. Accountants and financial advisers are clearly covered, but so, on the face of it, are lawyers, either as designers or organisers of the arrangement.^[2242]

Where professionals are under a duty to disclose tax avoidance schemes it overrides the normal rule of confidentiality to clients. Persons subject to legal professional priv­ilege are not included within the definition of ‘promoter’ of the schemes.^[2243] Lawyers wishing to claim exemption from reporting a tax avoidance scheme must establish that it is covered by either advice or litigation privilege. The House of Lords decision in the Three Rivers case, makes establishing this less difficult than did the Court of Appeal’s decision in the same case.^[2244] Accountants, unsurprisingly, consider that this gives lawyers an unjustified commercial advantage.

Although a lawyer claiming legal privilege does not have a duty of disclosure, the client does have a personal duty to disclose the scheme to the Revenue within five days of the first transaction forming part of the scheme. The lawyer must advise his client

of this. Lawyers should counsel reluctant clients to make disclosure, but, because such communications are privileged, it follows that there is no duty to report a client who fails to disclose their scheme to the authorities. It is arguable whether there is a duty to terminate the representation if the client does not disclose. This would depend on whether, by continuing to act, the lawyer might become complicit in a criminal pur­pose, that is, tax evasion.

IV.