The UK’s moneylaundering laws are now the toughest in the world. Lawyers are predicting that over the next few months they will prompt large numbers of professionals to report clients secretly to the authorities — in order to protect themselves.

Part 7 of the Proceeds of Crime Act 2002, which has recently come into force, targets the proceeds of any criminal conduct that would be an offence in Britain.

Family lawyers are anticipating that they will have to report divorcing husbands who have paid school fees through undeclared Swiss bank accounts, or wives who have paid the nanny cash. City lawyers fear that international clients could be discouraged from using UK law firms in case they are reported for something that is legal in their own country but would be illegal here.

One example is a Spanish bullfighter buying a house in London. The solicitor or estate agent involved should report him for possible money-laundering because, while bullfighting is legal in Spain, it is illegal here.

Jon Holland, a partner in the banking and financial litigation group at Lovells, says: “Everyone agrees the UK should not be seen as a haven for criminals. However, this regime goes too far — much further than in the US or Europe. The new reporting obligations could have an important impact on legitimate business coming to the UK.”

There has been money-laundering legislation since 1986, primarily focused on preventing the laundering of proceeds from serious crime, terrorism and drug trafficking.

Part 7 extends those powers to apply to the proceeds of any “criminal conduct”, no matter how minor. Anyone entering into an arrangement that he knows or suspects facilitates the acquisition, retention, use or control of criminal property on behalf of another person — such as transferring money to an offshore account or setting up a trust — risks up to 14 years’ jail and/or an unlimited fine.

The legislation then tightens its grip on professionals by saying they will be committing an offence if they know or suspect or have reasonable grounds for suspecting another person is engaged in money- laundering and fail to report it. The penalty is up to five years jail and/or an unlimited fine.

The failure-to-disclose offence applies to those now regulated by the financial sector. However, new money-laundering regulations, which come into force in June, under the second European money-laundering directive, catch any professionals, such as lawyers, accountants, estate agents and casino operators, involved in financial or property transactions.

Their key defence to these offences is that they make a suspicious activity report (SAR) to the National Criminal Intelligence Service (NCIS), which then has seven working days to give or refuse its consent to a transaction continuing.

It is an offence to “tip off” clients about a report, although a solicitor is protected by legal privilege if he is advising his client or if it is in connection with legal proceedings.

Edward Reed, an assistant solicitor with Macfarlanes’ private client department, says: “Common sense dictates that, from professional etiquette, we have to assert privilege, even if it is later overturned, and that we don’t automatically back down. But, at the other end of the scale, if we suspect something, we would be shooting ourselves in the foot if we didn’t report it.”

Jane Craig, a family law partner at the London law firm Manches, says: “It is a terrible worry. I have had clients where I have come across an undeclared bank account in Switzerland and I have said, ‘Put your hands up to the Inland Revenue and sort out your affairs.’ But there is a huge difference between that and reporting someone behind their back.”

A spokesman for the NCIS says it has been preparing for a rise in reporting by trebling the size of its economic crime branch. Since 2000, SARs have nearly doubled each year — from 18,408 to 31,251 in 2001, and to more than 60,000 last year. The spokesman says: “We have been very critical of the small percentage of reports made by lawyers — only 1 per cent in 2001. While their reports are of a very high quality, it still isn’t a shining example when feedback from police forces suggests that half of all money-laundering cases must have involved a solicitor or accountant.

“Over the past couple of years, there has been a move towards prosecuting professionals, which they should see as a marker. Their first step is to set up anti-money-laundering structures, which can include a link directly into the economic crime branch’s database.

“What professionals should remember is that they are reporting intelligence, not evidence, and confidentiality will be enforced. We carry out the initial checks and pass the information on to the relevant agency — a police force, Customs, Inland Revenue, the Benefits Agency. There is valid criticism that we don’t give any feedback but it is difficult to say that this report led to that conviction.”

Alison Crawley, the director of regulation at the Law Society, says it is drawing up guidelines: “But we keep being sidelined by people ringing up with new problems!” She also wants to draw up protocols with the Home Office, the NCIS, and the Lord Chancellor’s Department. But lawyers should not fear that they are in danger. “The requirements turn normal legal ethics on their heads. But the law overrides ethics and we are seeking ways of advising solicitors so they feel comfortable with the rules.”

Louise Delahunty, who chairs the Law Society’s money-laundering and serious fraud task force, is also trying to calm the profession’s fears. She says: “We are not somehow descending into Hades from the Garden of Eden — we have had money-laundering law and reporting obligations for years. While the new law is more stringent, the procedures should provide better protection for solicitors targeted by money-launderers.”

TIMESONLINE
www.timesonline.co.uk/legalarchive
Need a case to prove your point? Subscribe to our archive of The Times Law Reports dating back to 1985

Explore Law

• Columnists

• Law Panel

• Law Reports

• Student Law

Times Recommends

• The best legal yarns this Christmas
• Legal school 'earned £1m by exploiting bar course'
• Axe may fall on 5,000 more City lawyers