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Laundering in litigation

9 February 2009

The provision of legal advice and the conduct of litigation are not covered by the Money Laundering Regulations 2007. The rationale for this exclusion is the protection of a person's fundamental human right of access to justice.

This does not mean, however, that such activities are free from the threats posed by criminals. In fact recent calls to the Practice Advice Service and information provided to law enforcement suggest that litigation is an area of growing risk for money laundering and fraud.

The perception that law firms may be taking a more relaxed approach to due diligence and scrutiny of their client's conduct in litigation matters may be one reason for this shift in criminal activity.

Debt recovery is an area of increasing concern for money laundering. With banks and money service bureaux tightening their approach to accepting large amounts of cash, criminals are seeking alternative methods to get the cash generated from criminal activity into the financial system.

Setting up a cash intensive business is one such method. The criminal monies can be mingled with legitimate monies and make their way into the business's bank account without raising suspicion.

To transfer the funds from this cover business back to other parts of the criminal enterprise, documents are created to suggest that a debt is owed. A solicitor is approached to recover what they are told is a legitimate debt, the debtor agrees to make the payment, the funds are passed through the solicitor's account and back to the client.

While not always an easy methodology to spot, there are some emerging trends which highlight known warning signs that money laundering may be occurring in this context. These include:

  • non face-to-face client, who is often quite a distance from the firm
  • the debtor may also be quite a distance from the firm
  • scant paperwork supporting the alleged debt
  • the debt is settled very quickly, sometimes even before the first letter of demand
  • the client is willing to pay your fees even though you have done very little work
  • fees are overpaid and paid in advance, sometimes in cash and other times by fraudulent cheques
  • the client requests the funds recovered or the overpaid part of the fees to be paid to a third party.

To help protect your firm you should consider:

  • advising your litigators of this methodology and the warning signs they should be alert to
  • asking questions of your client, particularly the questions of why are you instructing my firm and why should these funds be paid to a third party
  • protecting your client account details by limiting their provision to clients
  • undertaking some due diligence on your litigation clients and, on a risk-sensitive basis, making searches for an ownership or other connection between the debtor and your client
  • only making payments against cleared funds.

Where you suspect that criminal property may be involved in a litigation retainer, and there is prima-facie evidence that you are being used to commit a crime or a fraud, legal professional privilege will not apply and you will need to consider making a report to the Serious Organised Crime Agency (SOCA) (now known as the National Crime Agency (NCA)) under 332 of the Proceeds of Crime Act.

For more information on money laundering warning signs see chapter 11 of the AML practice note and for more information on when you may need to make a report to the NCA see chapter 5 of the AML practice note.