Why dirty money is still a matrimonial issue

12 January 2012

When it comes to matrimonial lawyers and anti-money laundering, the mantra for many years has been: 'the case of Bowman v Fels means I don't have to worry about any of this and anyway, talking with my client about such issues would be tipping off'.

However a closer inspection of the legislation, the case law and a lawyer's ethical obligations to their clients shows that this approach is not justified and is exposing matrimonial lawyers to significant risks.

The scenario

Most matrimonial lawyers will be able to point to at least one client where allegations of tax evasion or the existence of other criminal property were made. For the purposes of this article we will consider allegations of tax evasion, although the principles would be the same for any other criminal property.

Leaving aside the initial question of whether these allegations are fabricated to try to inflict damage on the other party, you need to understand your position as the lawyer and your client's position with respect to both the criminal law and civil law.

Is anyone money laundering?

The first question to ask yourself is: Do I know or suspect that there is existing criminal property involved with this retainer?

In this scenario the answer, subject to a few questions of the client about the basis for their allegation, is yes. You have information that a person has evaded tax, which is a crime and that they have saved money as a result of that crime.

Further, potentially all of the matrimonial assets are now 'tainted' due to indirect benefits from this criminal activity.

The next question to ask is: Is anyone currently in possession of criminal property and so money laundering?

Whoever has possession of that criminal property now, with the knowledge or suspicion that they have not paid tax, will be money laundering under section 329 of the Proceeds of Crime Act.

Anyone who has possession of the criminal property after the divorce, with the requisite knowledge or suspicion, will also be money laundering.

Marriage is not adequate consideration for criminal property, either while the marriage is in existence or after it is dissolved. This means that those individuals (either your client or their spouse) will need to make an authorised disclosure and get consent to possess this criminal property, as this is the only other relevant defence to such a money laundering charge. (While there is an defence of reasonable excuse for failing to make an authorised disclosure, the argument that you were avoiding self-incrimination is unlikely to have much success given the overall purpose of the legislation.)

But what about Bowman v Fels I hear you say, that means none of this matters - right? The case of Bowman v Fels held that litigation itself (or the negotiated, mediated or arbitrated settlement of such a dispute) is not entering into an arrangement.

This means that the lawyer can be assured that they are not committing a criminal offence of money laundering under section 328 of POCA by helping the client end their marriage and sort out their affairs according to law.

It also means that the client is not subject to extra criminal sanctions simply as a result of seeking the divorce. The case also provided that privilege is not overridden by the provisions in Part 7 of POCA.

This means that you will have to consider how you received the information and whether the crime/fraud exemption applies before you, as the lawyer, consider any reporting obligations that you have under section 332 of POCA (the failure to report in the unregulated sector offence).

It is important to consider whether it really is the money laundering laws that have made this so complicated or whether matrimonial lawyers had obligations in this area before POCA. A matrimonial client was only ever entitled to their share of the legitimate assets of the marriage.

The assets obtained illegitimately were only ever held on trust for the victim of the crime and were always open to recovery by law enforcement agencies.

The client always needed legal advice on this issue so that they fully understood their legal position and could obtain the best possible settlement in all of the circumstances.

The practical consequences

Talk to your client about the allegations. Ask about the basis for the allegations and help them to understand the seriousness of the consequences, not only for their former spouse but also for themselves.

Explain the need to resolve outstanding tax obligations with the relevant authorities and the risk that if they do not law enforcement agencies will be able to claim it back from them at a later date.

If they are currently in possession of the criminal property, explain their need to obtain consent so that they are not charged with money laundering. Such an application for consent need not delay the litigation. You are only prevented from doing a prohibited act while you are awaiting consent and litigation is not a prohibited act.

You can also discuss the allegations and their resolution with the other side. You should consider incorporating any agreement for payment of outstanding tax within the settlement so that it is clear where the obligations lie.

If the client does not agree to make full disclosure to the relevant authorities you should consider whether it is ethically appropriate for you to continue in the retainer.

Irrespective of whether the client is willing to make full disclosure or not, you need to consider your own obligations under section 332 of POCA. As stated above, you will need to consider whether privilege applies so as to remove your obligation to disclose. While litigation privilege is wide, not every piece of information received during litigation is privileged.

But what about tipping off?

Since December 2007 litigation lawyers have not had to worry about tipping off. Section 333A of POCA specifically provides that the prohibition on disclosure only relates to situations where the information on which the SAR was based came to the person's knowledge in the course of business in the regulated sector. Matrimonial and other litigation is business outside the regulated sector and so this key element of the offence cannot be satisfied.

Section 342 of POCA still contains the prejudicing an investigation but this specifically excludes from the offence the making of a disclosure where you are a legal professional adviser and you are giving legal advice to your client or are involved in legal proceedings.

As always, your ethical obligation in the giving of the advice is to encourage your client to comply with the law, rather than telling them how to breach it.

Longer term consequences of not taking action

Advising clients in matrimonial disputes is quite often challenging, with tensions and emotions running high. It is not surprising that many matrimonial lawyers may not relish the idea of having to explain to the client that: 'the little bit of tax evasion that you think shouldn't really matter because everyone does it, actually makes you a money launderer and you need to sort it out with the authorities'.

It may even be tempting to consider whether it is possible to let the allegations slide on the basis that the client can ultimately deal with it should anyone ever find out. The client themselves may even pose such a course of action in response to your advice on the issue.

However with increased intelligence sharing and data matching between HMRC, DWP and financial institutions, the chances of tax evasion being discovered by the authorities is increasing all the time.

If you do not have the discussion with the client and in due course the authorities seek to recover assets from them, you may find that the client is in a position to sue you for negligence as you failed to give them full advice and act in their best interests.

Should you agree with the client to ignore their criminal activity and it is discovered in due course, the authorities may make a referral to the SRA and you could find yourself subject to a disciplinary charge for failing to uphold the rule of law and bringing the profession into disrepute.