Presumably, one of the most extensive international documents on combatting money laundering, and its connection to legal professionals, is that of the FATF’s 40
recommendations.194 FATF was created due to the realization that the United Nations is not properly equipped to regulate the highly technical financial industry.195 The organizations is an “international intergovernmental body”,196 having no separate legal persona, still
dominantly relying on the states which created it.197
Its membership criteria and extensive sanctioning mechanisms, makes its recommendations more effective, awarding it bigger binding force than suppression conventions, some argue.198 While in its official documents the word “should” is used (“countries should adopt its recommendations”), it shall actually be read as a “must”.199 Among others, the UN Security Council “strongly urges member states to implement the FATF recommendations”.200 Many countries (including the United States, also being a member)201 are committed to implement the FATF recommendations.202 In its implementation approach however, a strong emphasize is put on the lawyer-client relationship, the sanctity of the administration of justice, and the independence of the legal profession, which resulted in an approach
dominantly focusing on the education of lawyers, regarding their unintentional involvement in criminal schemes.203
Most of these recommendations are not directly applicable to lawyers.204 How they could nevertheless produce an effect, is if individual countries decide to adopt them as binding
194 FATF Recommendations ( n 54).
195 Mark Pieth, ‘International Standards against Money Laundering’ in Mark Pieth and Gemma Ailofi (eds), A Comparative Guide to Money Laundering: A Critical Analysis of Systems in
Singapore, Switzerland, the UK and USA (Edward Elgar 2004), 3, 8.
196 Cecily Rose, International Anti-Corruption Norms: Their Creation and Influence on Domestic Legal Systems (OUP 2015) 183–85.
197 Boister (n 84) 182.
198 Rose (n 196) 177.
199 ibid., 193.
200 United Nations Security Council Resolution 1617 ( 29 July 2005) S/RES/1617.
201 ‘FATF Members and Observers’ ( FATF) https://www.fatf-gafi.org/about/membersandobservers/ accessed 11 May 2022.
202 ‘Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing’ (The American College of Trust and Estate Counsel) https://www.actec.org/resources/voluntary-detect-and-combat-money-laundering/ accessed 11 May 2022 ( Good Practices Lawyer’s Guidance).
203A Lawyer’s Guide Against AML (n 178).
204 ibid.
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domestic law.205 Normally, members of FATF are required to implement the
Recommendations, but not all countries decided to choose so, or only half-heartedly.206 As a general rule, it is the individual countries’ domestic law, and not the 40 recommendations which binds lawyers and which they have to be aware of.207
Professional enablers are those individuals who have particular professional expertise in performing a specific service, and use this expertise, the professional status and reputation coming with it,208 to help their clients in committing financial crimes in a grand, and organized scale.209 Professional enablers are a distinct category from “inattentive” or
“negligent” lawyers, as they actively and intentionally create schemes and strategies for the smoother facilitation of crimes.210 It goes without mentioning that finding such deliberate intention on the side of Baker McKenzie CIS, would be extremely difficult with the evidence available.
The OECD identified the following attributes of such enablers: professional skillset, qualification, and training on a certain area of expertise, and setting up opaque,
non-transparent legal structures for avoiding investigative scrutiny.211 Every country shall make a domestic definition of professional enablers ( or use the one by the OECD) and a strategy coming with it.212
Using information from offshore leaks ( as did the ICIJ) or searching for some overlaps in legal advisors in previously discovered illegal transactions, could all point out more complex patterns of professional enabler involvement.213 Seeing all the disreputable individuals and entities which Baker was in a business relationship with, would justify this approach.
Analyzing information from STRs, could have the same outcome.214 Creating a database, listing previously compromised professional enablers can have a preventive/deterrent effect
205 ibid.
206 ibid.
207 ibid.
208 Kaunain Rahman, ‘Supervisory and professional bodies dealing with professional enablers of illicit financial flows’ (U4 Helpdesk Answer, 27 August 2021) https://www.u4.no/publications/supervisory-and-professional-bodies-dealing-with-professional-enablers-of-illicit-financial-flows.pdf accessed 11 May 2022.
209OECD Professional Enablers (n 158).
210 Rahman (n 208).
211 OECD Professional Enablers (n 158).
212 ibid.
213 ibid.
214 ibid.
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in the future for the involvement of these individuals in criminal activity, with the danger of damaging their professional reputation.215
One of the most important proposals which FATF recommends for a more effective
regulation of professional legal enablers, is the “risk -based approach”.216 This includes the most effective allocation of the limited resources which law enforcement officers possess to fight money laundering. Thus, those sectors which are deemed the most susceptible to money laundering, will receive the most attention, and getting allocated the greatest funding.217 These areas would also be subjected to enhanced customer due diligence procedures, and transactions within this sector would be more heavily scrutinized.218
There is no “universal risk-based approach” however, and the specific context, and the legal areas in which the legal professional operates ( how susceptible the activity of the lawyer would be to money laundering risk), must be considered.219 As we shall see, working for sanctioned entities in jurisdictions highly prone to corruption, shall be a factor to consider.
Big firms like Baker McKenzie, operating in multiple jurisdictions, must nevertheless have a consistent and unified working in applying the risk-based approach.220
It is very important to underline, that avoiding all risks by the legal professional is not an absolute obligation. If certain risk-mitigating measures have been implemented, and the necessary professional caution exercised, this shall be enough to prove the necessary diligence of a firm.221
A lawyer can still be liable for unintentionally assisting a client in the crime of money laundering, if it doesn’t conduct the necessary due diligence requirements.222 Normally, depending on the client, the circumstances present, and the type of transaction in which the lawyer assists its client, different gravities of due diligence shall be exercised by a firm.223 Within basic customer due diligence, one of the most crucial elements to verify is the identity of the client.224 To do this properly, reliable, and independent sources must be consulted,
215 ibid.
216 FATF Recommendations ( n 54) Recommendation 1.
217 Good Practices Lawyer’s Guidance (n 202).
218 ibid.
219 FATF Lawyer Guidance (n 157).
220 ibid.
221 ibid.
222 A Lawyer’s Guide Against AML (n 178).
223 ibid.
224 Good Practices Lawyer’s Guidance (n 202).
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such as the OFAC database, and the Specially Designated Persons list, which is the collection of all sanctioned individuals and legal entities, blacklisted by the US Department of Treasury.
There are several risk categories and areas which could help legal entities decide on how serious customer due diligence is needed, and whether there are any risk factors present which would justify this.
Firstly, there is the geographical risk category, based on the countries with a higher
susceptibility to money laundering.225 These areas can be the domicile of the client; the place where the transaction takes place; or the country where the source of funding is coming from.226 The Lawyers’ Guidance mentions those countries against which certain embargoes, or sanctions are in place, or where, because of a lack of sufficient AML policies, or due to the great level of corruption, a risk is materialized.227 Russia is a country heavily sanctioned by the international community since its aggressive expansionism in Ukraine, in 2014. To measure corruption, Transparency International’s Corruption Perceptions Index is a reliable source to consult.228 While Russia, with a score of 29 is the 136th on this list, Mongolia is on the 110th position, with a score of 35.229 These very low scores could point towards a
significant corruption crisis in these countries. Also, the Mongolian mining sector has been previously established as severally corrupt.230
When providing legal advice in these countries, or working with clients from them,
Recommendation 19 proposes law firms to conduct an enhanced customer due diligence.231 Looking at National Risk Assessments, we can get a reliable picture of whether conducting certain transactions in a given jurisdiction, would constitute risking involvement in a money laundering scheme.232 Mongolia is a highly susceptible jurisdiction to ML risks; with often-present financial crimes, fraudulent activities and corruption; where no adequate AML policies are in place, with a limited success of prosecutions; and where the supervision of DNFBPs is largely absent.233 Mongolia achieves either “low” or “moderate” level of
225 ibid.
226 ibid.
227 ibid.
228 ‘Corruption Perceptions Index’ (Transparency International, 2021) https://www.transparency.org/en/cpi/2021 accessed 11 May 2022.
229 ibid.
230 Erdene and Radchenko (n 22).
231 FATF Recommendations ( n 54).
232 Rahman (n 208).
233 The Asia/Pacific Group on Money Laundering, ‘Anti-money laundering and counterterrorist financing measures – Mongolia Mutual Evaluation Report’ (APG 2017).
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effectiveness” in most of the FATF Compliance Table categories, performing particularly weak in the most crucial, “Immediate Outcomes” categories, which deal with “understanding ML risks, and the actions coordinated to tackle them”, or the “successful investigations and prosecutions of money launderers”.234
According to its Mutual Evaluation Report, money laundering has a top priority in the Russian legislature, and the country has an incomparably better technological infrastructure to combat ML crimes than Mongolia ( Rosfinmonitoring), with ML threats successfully identified, and known of.235 There are still reasons for serious concern. This can be explained with the amount of corruption ( especially on the higher political levels), which can also explain the fact that although Russia conducts a great amount of AML investigations, they usually relate to lower level criminals, and hardly make it ( if ever) to the “top-tier”.236 Sanctions employed against natural persons are not effective enough, while the prosecution of legal persons ( such as Rostec), is not possible in the country.237 This is a country which, according to the Report is susceptible to a wide-range of ML risks, especially crimes related to corruption, and the laundering of proceeds from this activity.238
The second risk-category is connected to the person of the client,239 as that can significantly influence both the “scope, level and intensity” of the customer due diligence to be
conducted.240 PEPs ( also including the CEOs of state-owned companies such as Mr.
Chemezov and Rostec) can be more susceptible to ML risks, justifying an enhanced client vetting.241 The extent of this also depends on a multiplicity of factors, including the home country of the person or entity, and the exact type of work that the lawyer will be doing for them.242 Clients who have been previously convicted of financial crimes are explicitly included in this category.243Sergei Chemezov, his family, and the company he directs, had
234 ‘ Compliance Table’ (FATF, last updated: 22 February 2022).
235 FATF, EAG & Council of Europe, ‘ Anti-money laundering and counterterrorist financing measures – Russian Federation Mutual Evaluation Report’ (FATF 2019).
236 ibid.
237 ibid.
238 ibid.
239 FATF Lawyer Guidance (n 157).
240 Good Practices Lawyer’s Guidance (n 202).
241 ibid.
242 ibid.
243 ibid.
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been previously found to be involved in a money laundering offence, that of the Troika Laundromat scheme.244
In Russia, although AML regulations and oversight are present, the high level of state
corruption245 ( we are dealing with a State-owned cooperation, and President Putin’s longtime friend as a CEO), can be an aspect for proving the risk of a compromised client.246 Rostec is a Russian company, working in the arms trade, conducting a transaction in Mongolia, a country also susceptible to money laundering risks, with both countries having rather loose or absent AML provisions. Based on the publicly available information, the lawyer must do the necessary “checks” to make sure that the person it is going to enter into a professional relationship with, is not compromised.247 An argument can be in favor of Baker McKenzie nevertheless, that neither Mongolia, nor Russia can be seen as adequate jurisdictions in terms of data collection on these entities by a competent authority, and where access to such
sensitive data, is heavily restricted.248 In these situations, analyzing ML risks might be disproportionately burdensome for legal professionals. There is also no requirement to do a
“proper investigation” on the client, as law firms would not have sufficient time, manpower, or infrastructure for this.249 Arguably however, with the infrastructure and assets available for Baker, it would’ve been able to sufficiently identify the nature of its clients if it wanted to.
As Deutsche Bank has reported, suspicious transfers have started to emerge around the day of acquisition, with payments coming from unidentified sources.250 This also puts the current case study to a greater risk -category.251 Recommendation 23 would require lawyers to report such suspicious transactions, when suspicion arises that the funds involved in the transaction are from criminal activities252 ( and also if the scenario is not included in the professional privilege and secrecy exception)253. Certain transactional red flags which shall trigger
244 Antonio Baquero, ‘ A Family Affair: How the Relatives of a Russian State Company’s CEO Got Rich’ ( OCCRP, 8 October 2021) https://www.occrp.org/en/the-pandora-papers/a-family-affair-how-the-relatives-of-a-russian-state-companys-ceo-got-rich accessed 11 May 2022; Antonio Baquero, Max Jiménez, ‘ Laundromat Money Leads to Spanish Paradise’ ( OCCRP, 28 March 2019)
https://www.occrp.org/en/troikalaundromat/laundromat-money-leads-to-spanish-paradise accessed 11 May 2022
245 FATF, EAG & Council of Europe, ‘ Anti-money laundering and counterterrorist financing measures – Russian Federation Mutual Evaluation Report’ (FATF 2019).
246 Good Practices Lawyer’s Guidance (n 202).
247 ibid.
248 FATF Recommendations ( n 54).
249 ibid.
250 Freedberg and others (n 3).
251 Good Practices Lawyer’s Guidance (n 202).
252 FATF Recommendations ( n 54).
253 FATF Interpretative Note to Recommendation 23.
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suspicion are for example when a disproportionately huge private funding was provided, especially in comparison to the short amount of time since the company’s incorporation.254 Mongolia Copper has been registered in a private apartment in Ulaanbaatar, with a young 28-year-old as its CEO.255 Strangely enough, there was no publicly available information on him, besides the fact that he studied international law in a Mongolian university.256 It is rather suspicious that a recently incorporated company, registered in a private middle-class
apartment, led by a 28 year old, managed to participate in such a large financial transaction.
During so- called “one shot transactions”, when the lawyer is asked to undertake an
individual transaction-based service for the client (instead of having a continuous advisory relationship), and some of the above-mentioned risk factors are present, the risk of money laundering emerges.257
Without sufficient and adequate legal obligations on professional enablers, it is a matter of discretion for law firms to (when encountering red flags), make a professional judgement on whether to proceed with the representation of a client. Baker, in its Compliance Handbook, mentions certain questions which lawyers can ask themselves when deciding in the “grey areas of law”. These include for example: whether the conduct in question would violate a law; a rule of professional ethics; whether the individual be embarrassed if its friends or family would knew about it?; whether it can damage the reputation of the law firm?; or whether the individual would be embarrassed if they would report its actions in a news piece?258
I couldn’t find any appropriate risk management systems in place at Baker, which would determine whether the client is a PEP, or even a more extensive CDD system for high-risk clients. Given the fact that Baker has several offices and branches all around the world (geographical diversity), dealing with a multiplicity of legal areas ( operational diversity), AML controls should’ve taken these aspects into the conversation.259 Even if a law firm is not fully unified, but rather works as a loose cooperation of international branches, a common control framework regarding AML policy is nevertheless recommended.260
254 A Lawyer’s Guide Against AML (n 178).
255 Erdene and Radchenko (n 22).
256 ibid.
257 Good Practices Lawyer’s Guidance (n 202).
258 Baker Code of Conduct (n 60).
259 FATF Lawyer Guidance (n 157).
260 ibid.
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Obviously, supervision of lawyers is currently a national competence, with no unified policies for each country to implement. Nevertheless, certain minimum elements of such a policy have been brought forward previously, for example the requirement of lawyers to perform the above-explained CDD and risk assessment procedures; lawyers to report
suspicious transactions; and a national system which makes sure that adequate procedures are in place for the transparent and reliable licensing of legal professionals, and one which ensures the prompt investigations of legal enablers.261
As recommended, supervisory authorities and the regulations they provide for, should consider the size, business model of law firms; the services they provide; the countries they provide those services in; and the clients they provide it for.262 This would already establish a request for a particular regulatory oversight over firms like Baker McKenzie. In these very complex and multi-layered corporate structures which Baker McKenzie also possess, supervisory authorities shall consider whether these are an obstacle for an effective application of their functions, and whether there shall be something done about that.263 Most importantly, Recommendation 35 requires countries to have both the competence and the power for the imposition of criminal, civil or administrative sanctions, regarding legal professionals when providing certain high-risk services.264 Taking into account the structural hierarchies present in bigger firms such as Baker, senior managers and directors shall be sanctioned when legal professionals do not comply with the requirements.265 Once again, Baker’s rather complex business model, might constitute a problem in attributing
responsibility.
As previously mentioned, lawyers in the United States of America, are not subjected to general AML responsibilities ( general customer due diligence; the reporting of suspicious activities, etc).266
A couple of points of interest to keep in mind for a potential future legislative reform, and the enactment of a new AML provision, is to treat professional enablers as accessories to these financial crimes ( both reflected in the knowledge/intent requirements, and in the sentencing stage); to try to create specific provisions targeting these enablers ( based on due diligence),
261 ibid.
262 ibid.
263 ibid.
264 FATF Recommendations ( n 54).
265 FATF Lawyer Guidance (n 157).
266 OECD Professional Enablers (n 158).
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with a pre-defined definition of what category of people they are ( like law No. 2018-898 of France); also to move away from the “brute force” of criminal law, and apply alternative penalties in conjunction with it ( depending on the seriousness of the offence), such as disqualification and injunctions; and providing more clearly defined exceptions to the principle of professional privilege, as usually this is what keeps lawyers from sharing information with the authorities, becoming an accomplice to the crime as a result.267
267 ibid.
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Conclusion
In the wake of the Pandora Papers revelations, a bipartisan group of representatives
introduced the Enablers Act in the House of Representatives, on the 8th of October 2021.268 There is already a great sense of expectation regarding this bill, with experts calling it the
“most significant reform on anti-money laundering rules” in the US, since the Patriot Act and post 9/11 legislation.269 The Enablers Act would finally amend the 52 years old Bank Secrecy Act, by adding law firms and legal professionals into the category of “ financial
institutions”.270 This would mean that if the bill manages to pass, lawyers would be equally required to report suspicious transaction reports when representing clients; to conduct the previously described due diligence procedures on their clients, including the identification and verification of account holders; and to establish AML programs.271 Only recently, in June 2022, the Armed Services Committee of the House of Representatives decided to include the Enablers Act into the National Defense Authorization Act, which is national defense policy, being annually voted upon, and traditionally passed.272 This brought the existence of the Enablers Act, a significant step closer to becoming a reality.
Currently however, the legal system of the United States is not properly equipped to regulate the involvement of professional legal enablers in the crime of money laundering, precisely because it misses the aspects which the Enablers Act would finally impose on lawyers. As the United Nations and the system it maintains is currently do not possess adequate enforcement powers for multilateral treaties ( such as that of the UN Convention Against Transnational Organized Crime), coordinated domestic solutions must be sought, with international conventions providing a framework, a benchmark for national policies. While the United States formally fulfills the requirements of the UN Convention Against Transnational Crime, and the FATF Recommendations ( by criminalizing the crime of money laundering), these domestic offense definitions make it extremely hard to prosecute legal enablers ( as both knowledge and intention regarding these crimes must be established, instead of proving a
268 The Enablers Act (n 37).
269 Will Fitzgibbon, ‘US lawmakers call for crackdown on financial ‘enablers’ after Pandora Papers’ (ICIJ, 7 October 2021) https://www.icij.org/investigations/pandora-papers/us-lawmakers-call-for-crackdown-on-financial-enablers-after-pandora-papers/ accessed 27 June 2022.
270 The Enablers Act ( n 37) sect.2 (2) (BB).
271 ibid., sect.2 (b) (B).
272 Will Fitzgibbon, ‘House committee advances ‘once in a generation’ crackdown on enablers of financial crime’ ( ICIJ, 23 June 2022) https://www.icij.org/investigations/pandora-papers/congress-advances-once-in-a-generation-crackdown-on-enablers-of-financial-crime/ accessed 27 June 2022.
43
lack of due diligence). If the Enablers Act would pass the US Congress, most of the above demonstrated gaps would be remedied in the American legal system. A greater role shall be given to the recommendations of organizations specialized in international financial crime, not only complying with their formalistic requirements ( like to criminalize the crime of money laundering, which is normally fulfilled), but also by their substance.
After Pandora released all evils on mankind, only one thing remained in the jar: Hope.273 Everyone can decide, how to interpret the ending of this story. Does this mean that Hope is forever lost, locked away from humanity, inside an old and rusty box? Or does it signify that Hope is nevertheless there, staying with us, just waiting to be able to materialize. I sincerely hope it’s the latter.
273 ‘Pandora’s Box’ (n 1).
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Bibliography
Primary sources
Legislation
• Directive (EU) 2015/849 of the European Parliment and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC [2015] OJ L 141/73, art. 3(9).
• Executive Order 13662, 79 F.R 56 (2014).
• Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act, H.R. 5525 -117th Session in Congress ( 2021-2022) ( introduced in: 8 October 2021).
• The United Kingdom Criminal Finances Act 2017.
• United Nations Convention Against Illicit Traffic in Narcotics and Psychotropic Substances ( adopted 20 December 1988, entered into force 11 November 1990) 1582 UNTS 95.
• United Nations General Assembly Resolution 49/159 – Naples Political Declaration and Global Action Plan Against Organized Transnational Crime (21-23 November 1994) GA/49/159.
• United Nations Security Council Resolution 55/25 ( 8 January 2001) A/RES/55/25.
• United Nations Security Council Resolution 1617 ( 29 July 2005) S/RES/1617.
• United Nations Office on Drugs and Crime, ‘United Nation Convention Against Transnational Organized Crime and the Protocols Thereto’ (United Nations, 2004).
• United States Anti-Money Laundering Act (2020).
• United States Code Title 18, Section 2.
• United States Code Title 18, Section 656.
• United States Code Title 18, Section 1956.
• United States Code Title 18, Section 1961.