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1 Daniel Lakatos

Master’s Thesis

Supervisor: Felix Lüeth Public International Law University of Amsterdam 13724770

Lakatos.Dani12@gmail.com Word count: 12989

2022. 06. 30.

The regulation of legal professional enablers in connection to money laundering, from a transnational and a United States’ perspective - Baker McKenzie and Rostec State Corporation: A need for more effective implementation of international policy proposals?

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Table of contents

Abstract ... 3

Introduction ... 4

Methodology ... 9

Chapter I - Definitions and a historical perspective ... 10

The process of money laundering ... 10

SDNs, DNFBPs, PEPs and professional enablers ... 11

Baker McKenzie and transnational financial crime ... 13

Chapter II - The legal regulation of Baker McKenzie and professional legal enablers in transnational criminal law ... 16

Chapter III – The legal regulation of Baker McKenzie and professional legal enablers in the United States of America ... 23

A criminal law perspective ... 23

A civil law/ disciplinary perspective ... 29

Chapter IV -International recommendations and areas for improvement ... 33

Conclusion ... 42

Bibliography ... 44

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Abstract

The Master’s Thesis presents the problem of lack of regulatory oversight over professional legal enablers, based on the recent Pandora Papers revelations and Baker McKenzie’s involvement in international financial crime. While the United States is a significant

economic power, it still does not require non-bank enablers (such as lawyers) to implement Anti-Money Laundering measures, being mandatory for banks and other financial

institutions. A specific case study was chosen, when Baker have advised sanctioned Russian company Rostec in the sale of the Mongolian Erdenet mine, even though multiple suspicious circumstances had indicated the risk of a money laundering offense . The Thesis starts from a transnational criminal law perspective and concludes that presently there are no

internationally applicable legal instruments in force which could sufficiently regulate the transnational offence of money laundering and the involvement of legal enablers in them. The reason for this is due to the lack of a binding enforcement system of the United Nations, and multilateral conventions. The UN Convention Against Transnational Organized Crime nevertheless represents a demonstrative instrument for future domestic legislation. The Thesis also analyzes the legal system of the United States and its regulatory framework. One of the main ideas behind the research was to identify certain gaps in the US system and provide recommendations on their remedying. While formalistically, the country fulfills the necessary requirements of the UN Convention Against Transnational Organized Crime ( by criminalizing the crime of money laundering), it still does not require legal enablers to report suspicious transactions to authorities, or to conduct due diligence procedures before

representing a client. As most domestic offense definitions require explicit knowledge of, or intention regarding the crime, prosecution of enablers is extremely difficult. After identifying certain gaps in the legal system of the United States, in the last chapter recommendations are made about possibilities for further developing that legal framework, such as requiring the country to have a domestic definition of professional enablers; to extend regulatory oversight ( such as enhanced due diligence procedures; submitting suspicious transaction reports, etc.) over legal enablers, and codify specific domestic provisions on their participation in criminal activity. The recently proposed Enablers Act, if elaborated upon and eventually passed, could become a solution to this lacunae in legal regulation.

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Introduction

According to Greek mythology when Pandora’s box has been opened, all troubles were unleased on human civilization.1

Something similar happened on the 3rd of October 2021, when the International Consortium of Investigative Journalists (ICIJ), in cooperation with 150 global media partners, had

published several documents containing the hidden assets of 330 politicians and high-ranking people (including 35 current world leaders and 46 Russian oligarchs), from more than 90 countries.2 This made the Pandora Papers truly unprecedented, with 11,9 million financial records published.3

There was another interesting aspect to the story. The name of a greatly renowned law firm, Baker McKenzie has been mentioned in the documents 7500 times.4

Baker McKenzie is a global pioneer legal brand, leading the Thomson Reuters list,5 ranking the strongest law firms for 12 consecutive years.6 A law firm established in 1949, currently having 77 offices with 1400 partners, being present in 47 countries,7 also the first

international firm to operate in the former Soviet Union since 1989.8 Baker McKenzie is a very interesting case study. From one perspective, it’s a global brand with impeccable reputation, the winner of the Corporate Social Responsibility Award.9 On the other side, it is an effectively lobbying corporation, tirelessly blocking proposals for more effective financial regulation over lawyers.10 One of the reasons why Baker McKenzie is widely considered a pioneer in the legal field is the branding model it managed to create and sustain, making it

1 ‘Pandora’s Box’ (Merriam-Webster Dictionary) https://www.merriam- webster.com/dictionary/Pandora%27s%20box accessed 11 May 2022.

2 Fergus Shiel, ‘About the Pandora Papers’ (International Consortium of Investigative Journalists, 3 October 2021) https://www.icij.org/investigations/pandora-papers/about-pandora-papers-investigation/ accessed 11 May 2022.

3 Sydney P. Freedberg, Agustin Armendariz & Jesús Escudero, ‘ How America’s biggest law firm drives global wealth into tax havens’ ( ICIJ, 4 October 2021) https://www.icij.org/investigations/pandora-papers/baker- mckenzie-global-law-firm-offshore-tax-dodging/ accessed 11 May 2022.

4 ibid.

5 ‘Trust & relationships were crucial to top showing in Global Elite Law Firm Brand Index 2022’ (Thomson Reuters, 25 January 2022) https://www.thomsonreuters.com/en-us/posts/legal/global-elite-law-firm-brand- index-2022/ accessed 11 May 2022.

6 ‘ About Us’ (Baker McKenzie) https://www.bakermckenzie.com/en/aboutus accessed 11 May 2022.

7 ‘Firm Facts’ (Baker McKenzie, 2016) accessed 11 May 2022.

8 ibid.

9 ibid.

10 Freedberg and others (n 3).

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possible for partner firms to benefit from its global infrastructure and well-reputed name, without sharing profits or liability with it.11

According to the estimates of the United Nations Office on Drugs and Crime (UNODC), around 2 to 5 % of the global GDP is laundered each year, an amount between 800 billion to 2 trillion US dollars.12 Meanwhile, the United States of America is still within less than 10%

of countries not requiring non-bank enablers (like lawyers) to establish Anti-Money

Laundering (AML) guidelines, being mandatory for banks, and financial institutions.13 This is a significant issue, considering the discovered involvement of law firms in the Pandora Papers.

One of the published stories shed light to Bakers’ involvement as an advisor, in the legal transaction of selling the shares of the sanctioned Russian company Rostec, owned in the Mongolian Erdenet mine.14 The original Baker McKenzie branch possesses the form of a

“Limited Liability Partnership” (LLP), which combines the advantages of both a limited liability company, and a partnership.15 The reason why this form is so popular among law firms is that none of its partners would have to bear full responsibility or liability for the entirety of the firms’ debts or legal obligations.16

It is important to underline, that the law firm represented Rostec through Baker McKenzie CIS Ltd, 17 its subsidiary, registered on the Isle of Guernsey.18 It was registered in 1993, to perform legal services in the Commonwealth of Independent States, which encompasses 11 former Soviet countries, including Russia.19 The law firm, after the Russian invasion of Ukraine have issued a statement declaring that Baker McKenzie CIS Ltd will continue its

11 ibid.

12 ‘Money Laundering’ (United Nations Office on Drugs and Crime) https://www.unodc.org/unodc/en/money- laundering/overview.html accessed 11 May 2022.

13 Josh Rudolph, ‘ Regulating the Enablers’ (The German Marshall Fund of the United States of America, 21 September 2021) https://www.gmfus.org/regulating-the-enablers accessed 11 May 2022.

14 Freedberg and others (n 3).

15 Don Rafner, ‘The Advantages of LLP Over LLC for a Law Firm’ (Small Business)

https://smallbusiness.chron.com/advantages-llp-over-llc-law-firm-51699.html accessed 18 June 2022.

16 ibid.

17 Freedberg and others (n 3).

18 Sydney P. Freedberg, Agustin Armendariz, ‘ Baker McKenzie, a go-to firm for Kremlin-linked companies, now says it’s leaving Russia’ (ICIJ, 15 March 2022) https://www.icij.org/investigations/pandora-papers/baker- mckenzie-a-go-to-firm-for-kremlin-linked-companies-now-says-its-leaving-russia/ accessed 11 May 2022.

19 Baker & McKenzie - CIS, Limited, Doing Business in Russia ( Baker McKenzie 2017) xv.

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operation as an independent law firm, with the mother firm ceasing its Russian operations,20 also demonstrating the loose connection between Baker branches.

The acquiring entity of the Erdenet shares was a certain Mongolia Copper Corp`s, which subsequently turned out to be a front-acquirer to the privately owned Trade and Development Bank of Mongolia.21 Prime Minister Saikhanbileg justified the sale by nationalist sentiments, claiming that the mine will finally be a 100% state-owned property, as until then, it was shared with the Russians.22 With a 400 million dollars acquisition price, analysts are wondering what did the Russians really got in return of the sale, the price not seemingly sufficient to give up an essential element of their strategic positions in Mongolia.23 The fact that inter-state negotiations were held strictly behind closed doors, also did not contribute to a feeling of transparency.24 Contrary to what the Mongolian PM have previously claimed, instead of the State buying the mine, in reality it was the privately owned Trade and

Development Bank.25 As investigations have uncovered it, the Trade and Development Bank has illegally diverted public funds, lending it to Mongolia Copper to finance the transaction.26 That amount however only managed to cover half of the acquisition price, with the source covering the remaining expanses still unknown.27 According to Deutsche Bank, around the day of the transaction money had started to flow to Mongolia Copper from numerous unidentified sources, and the risk of money laundering emerges.28

The above-demonstrated case study will be used both as a starting point and benchmark in conducting the analysis of necessary AML guidelines and regulations in place. The following Thesis will examine the legal system of the United States of America, given that the Baker McKenzie is established in Chicago,29 and because the US still do not require mandatory AML guidelines for non-bank financial enablers.30

20 ‘Baker McKenzie Statement on Russian Operations’ (Baker McKenzie, 15 March 2022)

https://www.bakermckenzie.com/en/newsroom/2022/03/baker-mckenzie-statement-on-russian-operations accessed 12 May 2022.

21 Freedberg and others (n 3).

22 Lkhagva Erdene and Sergey Radchenko, ‘ The Mysterious Sale of Mongolia’s Erdenet Mine’ (The Diplomat, 9 July 2016) https://thediplomat.com/2016/07/the-mysterious-sale-of-mongolias-erdenet-mine/ accessed 18 June 2022.

23 ibid.

24 ibid.

25 ibid.

26 Freedberg and others (n 3).

27 ibid.

28 ibid.

29 ‘Firm Facts’ (n 7).

30 Rudolph (n 13).

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The following Thesis will attempt to answer the question of : How does the transnational criminal law regime and the domestic law of the United States of America regulate Baker McKenzie in providing legal advice to sanctioned Russian company Rostec and legal enablers’ participation in transnational financial crime, and how could international conventions, policy recommendations be used for more effective regulation?

The Master’s Thesis will be structured in the following way:

After the introduction of the problem statement and the reader’s guide, the research method will be described. This will be followed with a summary of what does the crime of money laundering entails. Subsequently, some crucial concepts and definitions will be consulted, such as Designated Non-Financial Businesses and Professions (DNFBPs); Specially Designated Nationals (SDNs) and Politically Exposed Persons (PEPs). Afterwards, a short historical departure to the origins of Baker McKenzie and its branding method will be demonstrated.

This section will be followed with an analysis of certain transnational conventions on the crime of money laundering and the criminal regulation of the offence in the United States.

Both Executive Orders 1366131 and 1366232 regarding sanctioned Russian companies;

section 1956 of Title 18 US Code concerning the laundering of monetary instruments33 in conjunction with section 2 regarding aiding and abetting to these crimes;34 and the US Anti- Money Laundering Act of 202035 will be consulted.

Next to such legal bases, the following Thesis will also try to present a professional ethics framework regarding the duties of lawyers. As there is no extensive federal regulation of lawyers in the US, the model rules of the American Bar Association36 will be analyzed.

Specific attention will be given to the crime-fraud exception to the attorney-client privilege.

Both gaps in the legal system, and areas for improvement will be identified.

Lastly, further possibilities will be examined to remedy gaps in domestic legislation, with the help of international policy proposals. These will include the Organization for Economic Co- operation and Development’s (OECD) recommendations on how to identify professional

31 Executive Order 13661, 79 F.R 15533 (2014) ( Executive Order 13661).

32 Executive Order 13662, 79 F.R 56 (2014) ( Executive Order 13662).

33 United States Code Title 18, Section 1956 ( US Code Section 1956).

34 United States Code Title 18, Section 2 ( US Code Section 2).

35 United States Anti-Money Laundering Act (2020) ( US AML Act).

36 American Bar Association, Model Rules of Professional Conduct (ABA 2020) ( ABA Model Rules).

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enablers and the Financial Action Task Force’s (FATF) recommendations on enhanced due diligence, and suspicious transaction reporting. To conclude the Thesis, a domestic, recently proposed US solution will be introduced: The Enablers Act.37

37‘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 Enablers Act).

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Methodology

Within the scope of this Thesis, I was researching the regulation of professional legal enablers in the United States and in an international setting.

Starting from the regulation of lawyers in an international framework, I described the

presently available international instruments for regulation, and moving towards presumably more effective domestic solutions.

I was intrigued to create a “sandwich framework”, wherein starting from an international perspective, I move towards a national legal inventory for regulation, just so at the end to arrive back to international policy proposals for more effective (domestic) regulation.

Another important consideration during the drafting was to proceed from the binding hard law (criminal law perspective) to a presumably more lenient, professional disciplinary perspective.

Presumably one of the hardest challenges during the formulation of the research problem, was whether to create a certain standard to measure the effectiveness of the US system in dealing with international financial crime. After careful considerations, I decided to instead focus on the national US framework on dealing with these issues; identify certain gaps in regulation; and provide useful remedies to those specific issues, with the help of international policy proposals.

During the research, I have consulted both primary and secondary sources, including US domestic law, international legal documents dealing with the regulation of the crime of money laundering and the role of professional enablers in them, model rules of lawyers’

associations, and international policy proposals.

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Chapter I - Definitions and a historical perspective

The process of money laundering

According to the FATF, the crime of money laundering is the “ processing of criminal proceeds to disguise their illegal origin”.38

This means an injection of illegitimate proceeds to the legal economy.39 In other words, money laundering is a way for criminals to be able to use their illegal funds in the legal economy, by giving them legitimate provenance.40

In general, we can divide the procedure of money laundering into three stages:

During the placement stage, the criminal injects the “dirty money” into the legal economy;41 then it performs a number of transactions to cover the original source of the money, called layering;42 while lastly, the recently laundered “white money”, is re-integrated by the criminal in legitimate investments, assets.43

Money laundering was made a federal crime in the U.S. in 198644 and is addressed under section 1956 of Title 18 U.S.C45.

38 ‘Money Laundering – Frequently Asked Questions’ (FATF) https://www.fatf-gafi.org/faq/moneylaundering/

accessed 18 June 2022.

39 ‘Money Laundering’ (Europol) https://www.europol.europa.eu/crime-areas-and-statistics/crime- areas/economic-crime/money-laundering accessed 11 May 2022.

40 ‘What is money laundering?’ (Financial Intelligence Unit - the Netherlands) https://www.fiu- nederland.nl/en/about-the-fiu/what-is-money-laundering accessed 11 May 2022.

41 James Chen, ‘Money Laundering’ (Investopedia, 25 February 2022)

https://www.investopedia.com/terms/m/moneylaundering.asp accessed 11 May 2022.

42 Friedrich Schneider, Ursula Windischbauer, ‘ Money laundering: some facts’ (2008) 26 European Journal of Law and Economics 387, 394.

43 ibid.

44 United States Money Laundering Control Act (1986).

45 US Code Section 1956 ( n 33).

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SDNs, DNFBPs, PEPs and professional enablers

Specially Designated Nationals (SDNs) are those individuals or companies which are either acting for or owned by sanctioned countries.46 Both Rostec and its CEO Sergei Chemezov fulfil this this category. In the United States, the supervising authority of these entities is the U.S Treasury, and the Office of Foreign Assets Control ( OFAC).47 Normally, not only the assets of these people are blocked in the host country, but American citizens are prohibited from transacting with them.48 Both against the company Rostec (Executive Order 13662)49 and its CEO Sergei Chemezov (Executive Order 13661)50 there are currently OFAC sanctions in place.51

Designated Non-Financial Businesses and Professions (DNFBPs) are those non-financial sectors which have been identified as susceptible to the threat of money laundering.52 Despite their non-regulation, these actors can heavily contribute to money laundering processes.53 The FATF 40 recommendations are incentivizing countries to require DNFBPs to equally have AML policies in place, identifying risks and taking actions on them, 54 providing them the same degree of compliance as financial institutions.55 According to FATF, “ lawyers, notaries, other independent legal professionals and accountants” are DNFBPs,56 including Baker into this category.

46 ‘Specially Designated Nationals and Blocked Persons List’ (US Department of Treasury, last updated: 9 May 2022) https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked- persons-list-sdn-human-readable-lists accessed 11 May 2022 (OFAC Sanction List).

47 ‘What are Specially Designated Nationals (SDNs)?’ (Dow Jones)

https://www.dowjones.com/professional/risk/glossary/sanctions/specially-designated-nationals/ accessed 11 May 2022.

48 ibid.

49 Executive Order 13662 (n 32).

50 Executive Order 13661 (n 31).

51 OFAC Sanction List (n 46).

52 ‘ What is DNFBP’ (Cayman Islands Government – Department of Commerce & Investment) https://www.dci.gov.ky/what-is-dnfbp accessed 11 May 2022.

53 Lishan Ai, ‘A cost-effective strategy of implementing international anti-corruption initiatives - Enhancing the role of anti-money laundering in combating corruption’ (2013) 16(1) Journal of Money Laundering Control 83, 85.

54 Financial Action Task Force, International Standards on Combatting Money Laundering and the Financing of Terrorism & Proliferation - The FATF Recommendations (FATF 2012-2022) ( FATF Recommendations).

55 ‘DNFBP - Designated Non-Financial Businesses and Professions’ (Comply Advantage)

https://complyadvantage.com/insights/anti-money-laundering/designated-non-financial-businesses-professions/

accessed 11 May 2022.

56 FATF, ‘FATF Recommendations 18 and 23: The Application of Group-Wide Programmes by Non-Financial Businesses and Professions Explanatory Materials’ (FATF, 2021) 3.

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There is no universally agreed definition on which individuals the category of Politically Exposed Persons (PEPs) covers.57 According to the definition of the EU Anti- Money Laundering Directive, PEPs are “natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons.”58 Within this broad category of individuals, several different people are included, like prime ministers, members of the government, heads of states.59 These people, due to the prominent public functions they hold, might be more susceptible to money laundering risks and conducting transactions with. Arguably, leading a State-owned company, being one of the most dominant players in the Russian army sector, qualifies Sergei Chemezov as a PEP.

57 Kim-Kwang Raymond Choo, ‘Politically exposed persons ( PEPS): risks and mitigation’ (2008) 11(4) Journal of Money Laundering Control 371, 372.

58Directive (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).

59 ‘Politically exposed persons (PEPs)’ ( Australian Government, last updated: 16 March 2022)

https://www.austrac.gov.au/business/how-comply-and-report-guidance-and-resources/customer-identification- and-verification/politically-exposed-persons-peps accessed 12 May 2022.

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Baker McKenzie and transnational financial crime

While Baker declares that they “do not do business with disreputable characters”60, it was representing half a dozen State-owned/controlled sanctioned Russian entities,61 including Rostec. The fact that Baker was involved in at least 440 offshore company registrations, is an equally alarming factor.62

Russel Baker, Baker McKenzie’s co-founding partners’ idea about a global law firm with offices in every possible jurisdiction where US companies would do business, manifested itself in a company specializing in advising multinationals outside their home jurisdictions.63 The great innovation in his ideas found basis on the fact that these branches would function as equivalents of a local firm with locally selected lawyers.64

While the law firm strongly denies its characterization as a “franchise”,65 it nevertheless established a highly successful franchise brand on the legal market, with local, independent firms sharing the same brand name, connected to the same infrastructure.66 Despite the attempts for greater unification of this “loose confederation of independent member firms”,67 those continued to operate individualistically, remaining a “number of legally separate constituent entities”.68

As it becomes obvious from the leaked documents, Baker McKenzie delegated a significant amount of its work to offshore providers.69 Bakers’ flexible corporate model comes handy in these instances, by sharing work with overseas providers, letting the partner firms benefit from its global brand, without sharing liabilities.70

60 Baker McKenzie, Code of Business Conduct ( Baker McKenzie 2015) ( Baker Code of Conduct).

61Freedberg and Armendariz (n 18).

62 Freedberg and others (n 3).

63 Christopher F. Stoakes, 'Is Baker & (and) McKenzie a Firm or a Franchise' (1985) 4 International Financial Law Review 16.

64 ibid.

65 ibid.

66Freedberg and others (n 3).

67 ibid.

68 ‘Baker McKenzie’ (The Lawyer) https://www.thelawyer.com/baker-mckenzie/ accessed 12 May 2022.

69 Anna Massoglia, ‘Pandora Papers reveal offshore finances of the global elite currying influence in U.S’ (Open Secrets, 8 October 2021) https://www.opensecrets.org/news/2021/10/pandora-papers-reveal-offshore-finances- global-elite-currying-influence-in-us/ accessed 18 June 2022.

70Freedberg and others (n 3).

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When the law firm advised Rostec in March 2016,71 the company was already sanctioned by OFAC due to Russia’s invasion of Crimea in 2014, with rumors of corrupt arm deals

surrounding the entity.72 Baker nevertheless proceeded with its legal advisory role, conducting the job through Baker McKenzie CIS.73

It is very important to mention that OFAC do not prohibit law firms to provide legal advice to sanctioned entities and individuals per se.74 The manner, and the substance of this advice however is highly regulated. But even if the service provided by Baker McKenzie CIS, would not be included in the range of permitted services, the following issue arises: these OFAC Guidelines only apply to US persons, and technically, the people working in Baker CIS Limited, were mostly Russian nationals, like Kirill V. Mansahin, being senior advisor on the Rostec case.75 For the sake of the Thesis however, since we have no knowledge of any explicitly given illegal advice from Baker, let us assume that the advisory relationship was according to the OFAC Guidelines.

Based on Executive Order 13661, signed and promulgated by President Obama, property and interests already, or subsequently present on the territory of the United States, were blocked regarding persons “ operating in the arms or related material sector in the Russian

Federation”.76 Sergei Chemezov, CEO of Rostec, one of the most significant arms suppliers to the Russian military, is included in this category. Section 5(a) of the same order further prohibits any of those transactions which “evades or avoids, or has the purpose of evading or avoiding, causing a violation of, or attempts to violate any of the prohibitions”.77 Paragraph b of this section further prohibits any conspiracies to violate such sanctions.78

Executive Order 13662 on the other hand, was specially sanctioning those individuals and legal entities79, who operate in certain pre-determined sectors of the Russian Federation, such as “defense”.80 The company Rostec is likewise included.

71‘Rostec sold 49% of shares in Erdenet Mining Corporation to Mongolian Copper Corporation’ (Rostec, 30 June 2016) https://rostec.ru/en/news/4518501/ accessed 11 May 2022.

72 Freedberg and others (n 3).

73 ibid.

74 Department of the Treasury, ‘Guidance on the Provision of Certain Services Relating to the Requirements of U.S Sanctions Law’ (OFAC, 12 January 2017).

75 ‘Kirill V. Mansahin’ (Baker McKenzie) https://www.bakermckenzie.com/en/people/m/manshin-kirill-v accessed 12 May 2022.

76Executive Order 13661 (n 31), sect. 1(a).

77 ibid., sect. 5(a).

78 ibid., sect. 5(b).

79 Executive Order 13662 (n 32), sect. 6(a).

80 ibid., sect. 1(i).

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The question thus holds, whether the suspicious circumstances present during the transaction would have justified Baker McKenzie a more diligent client vetting before entering into business relationship with Rostec, and whether they adhered to their limited, but nevertheless present obligations in this regard?

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Chapter II - The legal regulation of Baker McKenzie and professional legal enablers in transnational criminal law

As the United Nations have defined transnational crime, these are offences “whose inception, perpetration and/or direct or indirect effects involve more than one country”.81 So the broad category of transnational crimes includes offenses that cross national borders or affects more than one state’s interests.82 These crimes are usually committed by non-state actors,83

incentivized by financial motivators,84 often intertwined with legal markets,85 such as the field of lawyers.

While international criminal law is concerned with “core crimes” (genocide, war crimes, crimes against humanity and aggression), transnational criminal law covers those crimes which are of an international concern, established in international treaties.86

Under the current regime of the International Criminal Court (ICC), money laundering and international financial crime is not included, although connections exist between the financing of the mentioned core crimes, and their commissions, making them nevertheless relevant to the ICC.87

A general criticism formulated against the way “transnational” is defined is that it implies a certain cross-border activity, not always present in these crimes.88 While the Erdenet mine transaction took place in Mongolia, the fact that it involved a Russian company, and an American law firm as legal advisor, gives a legitimate concern to other states as well in the money laundering offense. These cases shall also be treated as “transnational”.

81 UNODC, Results of a Pilot Survey of Forty Selected Organized Criminal Groups in Sixteen Countries ( UNODC 2002).

82 John Wilson, ‘ Transnational Crime’ in Alexander K. Lautensach & Sabina W. Lautensach (eds.), Human Security in World Affairs: Problems and Opportunities (2nd edn, Caesarpress 2020) 335.

83 M. Cherif Bassiouni, ‘An Appraisal of the Growth and Developing Trends of International Criminal Law’ (1974) 45 Revue Internationale De Droit Penal 405, 421.

84Neil Boister, An Introduction to Transnational Criminal Law (2nd edn, Oxford University Press 2018) 5.

85 Pino Arlacchi, ‘The Dynamics of Illegal Markets’ in Phil Williams and Dimitri Vlassis (eds), Combating Transnational Crime: Concepts, Activities and Responses (Frank Cass 2001) 7.

86 ‘E4J University Module Series – Internationl Criminal Law and Transnational Criminal Law’ ( UNOCD, 2019) https://www.unodc.org/e4j/en/firearms/module-5/key-issues/international-public-law-and-transnational- law.html accessed 17 June 2022.

87 ‘Financial investigations and recovery of assets’ ( ICC, 2017) 3.

88 Cyrille Fijnaut, ‘Transnational Crime and the Role of the United Nations’ (2000) 8 European Journal of Crime, Criminal Law and Criminal Justice 119, 120.

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Unfortunately, while currently there is no unified international system to adequately address transnational crime within the UN regime, certain treaties and international cooperative efforts have nevertheless been established. Starting a cooperative international action, we need a clear transnational interest in the suppression of these crimes,89 present at the crime of money laundering, crossing over borders and corrupting the international financial system.90 The first international criminalization of money laundering was included in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, adopted in Vienna, 1988.91 This Convention already presented the crime of money laundering as an “ancillary one”,92 requiring a “predicate offense” committed before the crime of money laundering, to which it is connected.93 In this Convention, predicate offense only covered drug trafficking related ones.94

So, while nowadays the crime of money laundering is considered an entirely independent offense, it is nevertheless conditioned upon the commission of another crime. This category of “predicate offenses”, has been greatly broadened since then, also in line with FATF Recommendation 3.95 Currently, we can see a trend where money laundering can emerge in virtually any context, making such Conventions significantly limited in scope.

On the 15th of November 2000, the United Nations General Assembly adopted the Convention Against Transnational Organized Crime.96 This is a truly remarkable legal instrument, comprising a wide array of transborder crimes.

The Convention’s drafters were seriously concerned regarding the “negative economic and social implications related to organized criminal activities”97 and wanted to adopt an instrument, dealing with this.98 The fact that the Convention technically reached universal

89Boister (n 84) 170.

90 Vito Tanzi, ‘Money Laundering and the International Financial System -IMF Working Paper No 96/55’ (IMF, 1996), 6–7.

91 United Nations Convention Against Illicit Traffic in Narcotics and Psychotropic Substances ( adopted 20 December 1988, entered into force 11 November 1990) 1582 UNTS 95 ( UN Narcotics Convention).

92 Norman Abrams, ‘The New Ancillary Offences’ (1989) 1 Criminal Law Forum 5-6.

93 Boister (n 84) 173.

94UN Narcotics Convention, art.3; art.2.

95 FATF Recommendations ( n 54).

96 United Nations Security Council Resolution 55/25 ( 8 January 2001) A/RES/55/25.

97 ibid.

98 Tania Bañuelos Mejía, ‘The United Nations Convention against Transnational Organized Crime 20 Years from its Adoption -Strengths, Achievements and Challenges Ahead’ (2019) 3(2) Brill, 6.

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adherence99 (achieving the first step towards future implementation by States) must be a reason for celebration.

The Convention applies to both offenses established in accordance with art.6 (laundering of monetary instruments), and so-called “serious crimes”, punishable by a minimum of 4 years penalty restricting personal freedom.100 The Convention only applies to offenses with a transnational nature, involving an organized criminal group.101

One of the strengths of the Convention is its flexible application to a diverse and broad category of offenses, the legal instrument being both universal and effective in nature.102 The legitimate question nevertheless stands whether such framing of the Convention, intended to apply to highly diverse categories of offenses, wouldn’t eventually render it ineffective?

“Transnational offenses”, according to the Convention, do not only cover those crimes which were committed in more than one state, but could also include offenses taking place in a single country if “substantial part of its preparation, planning, direction or control took place in another”; where a transnational organized criminal group was involved; or where its commission has substantial effect on another state.103 This would significantly broaden the Convention’s scope, and would make it possible to prosecute the perpetrators involved in the Erdenet mine laundering scheme, if it would turn out that a substantial part of its preparation took place in another jurisdiction ( eg. US or Russia), or the activity was directed, controlled from elsewhere. This would potentially provide a legitimate answer to the criticism

formulated at the beginning of the section about transnational crimes being narrowly defined.

Article 6 of the Convention is concerned with the crime of money laundering.104 As a

preliminary step, this provision requires States to adopt all necessary legislative measures to criminalize the crime of money laundering.105 This is a “formalistic” requirement, also fulfilled by the US legal system,106 following the implementation requirements of Art. 34.107

99 United Nations General Assembly Resolution 73/151 (17 December 2018) A/RES/73/151.

100 UNODC, ‘United Nation Convention Against Transnational Organized Crime and the Protocols Thereto’

(United Nations, 2004) (UN Transnational Organized Crime Convention), art.2.

101 ibid., art. 4.

102 Mejía (n 98) 8.

103 UN Transnational Organized Crime Convention( n 100) art.3(2).

104 ibid.

105 ibid.

106 FATF and APG, ‘Anti-money laundering and counterterrorist financing measures –United States Mutual Evaluation Report’ (FATF 2016) 23.

107 UN Transnational Organized Crime Convention( n 100) art.3(2).

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Sub-paragraph (a)(i) requires the criminalization of those cases where an individual converts or transfers a property, with the knowledge that such is the proceeds of a crime, for the specific reason of concealing its illegal origins.108 This offense would include scenarios where illegal assets are converted to legitimate ones, for example, buying real estate with illegally obtained funds.109 Buying shares in the Erdenet mine with illegally obtained assets (through diverting public funds), satisfies this requirement.

It is a positive characteristic of the Convention that similar to the Vienna Convention, it also requires states to criminalize aiding, abetting and participation in the crime.110

Next to the requirement of criminalizing the crime of money laundering, the Convention also includes certain measures to combat it, for countries to implement. Based on article 7, a

“comprehensive domestic regulatory and supervisory regime” shall be established, also applicable to ( next to banks and other financial institutions) “other bodies particularly susceptible to money laundering”.111 Reading the travaux preparatoires to the Convention however, it becomes obvious that its drafters were thinking of other intermediaries such as stockbroking firms, securities dealers or currency brokers, omitting the legal field from the instrument’s scope of application.112 There is no evidence within the Convention, that its provisions (know your customer rules, suspicious transaction reporting’s, etc.), would equally apply to lawyers.113

The Convention nevertheless gives credit to the work of international organizations, by requiring States to consider the guidelines adopted by them, while creating their domestic regulatory frameworks.114 The recommendations of FATF were specifically understood under this provision.115

Art. 10 of the Convention gives the possibility for finding responsibility of legal persons, including art. 6 offenses, however unlike under other sections of the Convention, here the nature of the sanction (be it criminal, civil or administrative) is not specifically prescribed

108 ibid.

109UNODC, Legistlative Guide for the Implementation of the United Nations Convention Against Transnational Organized Crime (United Nations, 2004) 42 ( Transnational Organized Crime Convention Legislative Guide).

110 UN Transnational Organized Crime Convention( n 100) art. 6(1)(b)(ii).

111 ibid.

112 UNODC, Travaux Preparatoires of the negotiations for the elaboration of the

United Nations Convention against Transnational Organized Crime and the Protocols thereto ( United Nations 2006) 73.

113 Transnational Organized Crime Convention Legislative Guide (n 109) 39.

114 UN Transnational Organized Crime Convention( n 100) art.7(3).

115 Transnational Organized Crime Convention Legislative Guide (n 109) 47.

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until, it’s “dissuasive, effective and proportionate”.116 It goes without mentioning that evaluating a sanction in comparison to this criterion would not only be difficult and onerous but presumably also arbitrary. As we shall see in the following section, in the United States of America, the regulation of law firms is mainly taking place on a professional disciplinary level, under the guidance of the American Bar Association.

A “realist” or “organizational” model regarding corporate liability shall be established, where evidence is searched for in terms of the fault of the entire organization, found in its structural, or policy deficiencies, failing to adequately supervise the employees working for it, the lawyers.117 The legal system of the United States of America is based on the doctrine of respondeat superior, enshrined in its case law.118 This doctrine technically holds the

corporation liable for the acts of its agents, equating the actus reus and mens rea of the latter, with the former.119 The main criteria for such attribution would be that the agent acts within the scope of its employment, and at least partly for the reason to benefit the corporation in question.120 In theory thus, the United States system would be equipped to adhere to the obligations required by the Convention.

The fact that Baker McKenzie had continuously and on multiple occasions advised

“disreputable characters”, and individuals or entities clearly committing criminal conduct ( as the Pandora Papers uncovered it), point towards an assumption which would hold the law firm responsible for its structural deficiencies.

The only valid excuse which could be made available for a corporation in these situations, is that of due diligence, proving that it took all reasonable steps to ensure compliance, and eliminated any organizational fault ( such as ineffective channels of communication between different branches; failure of exercising adequate supervision and management, etc).121 Once again, the fact that Baker decided to remain in a professional relationship with such entities regardless of their sanctioning, and the data available on them, is problematic to say the least.

When it comes to transnational crimes, one of the main practical hurdles in front of their prosecution is that of the principle of sovereign equality, and the non-intervention into a

116 UN Transnational Organized Crime Convention( n 100).

117Transnational Organized Crime Convention Legislative Guide (n 109) 83.

118Lake Shore & Mich. S.R. Co. v. Prentice, 147 U.S. 109, 110 (1892).

119 Ved P. Nanda, ‘Corporate Criminal Liability in the United States: Is a New Approach Warranted?’ (2010) 58 The American Journal of Comparative Law’ 605, 607.

120 United States v. One Parcel of Land, 965 f.2d 311 (1992).

121 Transnational Organized Crime Convention Legislative Guide (n 109) 88.

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sovereign states’ internal affairs,122 included in art. 4.123 While these crimes clearly “spill- over” from one state’s territorial jurisdiction to another, with a multiplicity of participants involved from different nationalities, it is hard to make a determination on who possesses the most valid claim for prosecution. This provision also prohibits any party to the instrument ( such as the United States) to exercise any of its domestic functions, or jurisdiction in other countries ( be it Mongolia or Russia), deemed an exclusive competence of the home country.124

Next to the obvious example of the “territorial principle” ( when a state could automatically exercise its jurisdiction based on the fact that the crime happened on its territory),125 a state would also have a right to exercise such jurisdiction if the offence was committed against, or by its national, or if the crime of money laundering was committed “with a view to the commission of an offense within its territory”.126 This exercise of jurisdiction nevertheless must still be subject to art. 4, and the principle of sovereign equality.127

Interestingly, it is not required that the domestic implementations contain the “transnational- nature” or the involvement of an “organized criminal group”, in these crimes.128 This makes domestic prosecution easier, and possibilities broader.

However, if there is no requirement on states to domestically criminalize money laundering as a “transnational crime”, or with an “organized group element”, while on the other hand also missing a United Nations body for the supervision, or the enforcement of this

Convention requiring such elements, the question holds what is the usefulness of this instrument?

The crisis of multilateralism, and the long and wordy proceedings which represented the adoption and subsequent workings of the Convention can be seen in the difficulty of enforcement of such a document, (adopted not by the UN Security Council but the General Assembly) and the UN not having an effective enforcement system in place, making the international prosecution of money laundering significantly harder.129

122 ibid., 16.

123 UN Transnational Organized Crime Convention( n 100).

124 ibid.

125 Cedric Ryngaert, Jurisdiction in International Law ( 2nd edn, Oxford University Press 2015).

126 UN Transnational Organized Crime Convention( n 100) art. 15.

127 ibid.

128 Transnational Organized Crime Convention Legislative Guide (n 109) 8.

129 Mejía (n 98) 17.

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After carefully analyzing the Convention, it can be declared that as an enforceable

international document for the international prosecution of the crime of money laundering, it does not work.

The main issue is clearly to be found in the fact, that documents and international instruments regarding the crime of money laundering are mainly conceptualized as political declarations (like the Naples Political Declaration and Global Action Plan Against Organized

Transnational Crime)130, instead of enforceable international instruments.

This, however, does not render the Convention useless, which could nevertheless be used in close cooperation with other instruments of international organizations (FATF

recommendations),131 if we conceptualize it as a framework, and legislative guidance on subsequent domestic prosecution.

130 UNGA Resolution 49/159 – Naples Political Declaration and Global Action Plan Against Organized Transnational Crime (21-23 November 1994) GA/49/159.

131 Mejía (n 98) 21.

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Chapter III – The legal regulation of Baker McKenzie and professional legal enablers in the United States of America

A criminal law perspective

§ 1956 of Title 18 of the US Criminal Code, regulates the laundering of monetary

instruments, in the United States.132 The requirements for the offense are knowledge that a financial transaction “involves the proceeds of specified unlawful activity”, or simply knowing that the purpose of the transaction in question is “to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of a specified unlawful activity;”.133

In paragraph 7, under the broad category of “specified unlawful activities”,134 the crime of laundering of monetary instruments is included.135 Currently, sentencing for this offense ranges from a fine of not more than 500.000 dollars, or imprisonment of not more than twenty years,136 also fulfilling both the “serious offence”,137 and criminalization requirements138 of the UN Convention Against Transnational Organized Crime.

As investigations discovered it, the Trade and Development Bank diverted assets from a Mongolian public fund and lent it to Mongolia Copper. This activity would be unlawful by § 1956, being to disguise the source of the money.139 For the fulfillment of such an offense definition, a specified unlawful activity is needed, in connection to the crime of money laundering.140

The federal crime of embezzlement is retained in various provisions of the US Criminal Code. “Embezzlement” has been previously characterized as the “fraudulent appropriation of property by one lawfully entrusted with its possession”.141 The Mongolian Trade and

Development bank had been entrusted with public funds, expensive publicly held areas and

132 US Code Section 1956 (n 33).

133 ibid.

134 ibid.

135 United States Code Title 18, Section 1961(1).

136 US Code Section 1956 (n 33).

137 UN Transnational Organized Crime Convention( n 100) art.2.

138 ibid., art.6.

139 US Code Section 1956 (n 33).

140 ibid.

141 Moore v. United States, 160 U.S. 268, 269-270 (1895).

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buildings, from the State of Mongolia.142 The offense involves a special, (fiduciary)

confidential relationship where the person in whose possession the funds have been entrusted to, shall not convert, or transfer those funds without prior authorization, or contrary to the law.143 Over these assets, the entrusted person has considerable control, this special

relationship existing exclusively in connection to these funds 144( such as in relation to public funds involved in the Mongolian scandal).

Given that most US criminal code provisions regarding embezzlement, exclusively include government agents and government employees in their scope, they are inapplicable to our case study, the Trade and Development Bank being a private entity.

Section 656 of the US Criminal Code nevertheless deals with “theft, embezzlement, or misapplication by bank officer or employee,145 which might nevertheless be applicable. This offense definition is fulfilled if a bank employee “embezzles, abstracts, purloins or willfully misapplies any of the moneys, funds or credits of such bank”, or those funds which were

“entrusted to the custody or care of such bank”.146 While entrusting a privately held bank with the application of public funds would clearly fulfill this criteria, we do not have enough evidence on the nature of the offense (who embezzled the public funds?; did that person had the necessary intent?; etc.) to sufficiently corroborate the fulfillment of this provision.

In terms of the venue for prosecution for a money laundering claim, this can either be brought in the US district where the financial transaction took place, or in the district from which the illegal proceeds of the unlawful activity were transferred from.147 This means that the venue for prosecution cannot be based in the United States, as Baker McKenzie conducted the transaction in Mongolia, with no territorial links to the US. This is a clear jurisdictional limitation on prosecution, and another example on how the subsidiary branch of an American company could make it significantly harder for money laundering laws to regulate it, when operating in multiple jurisdictions.

142 Jargal DeFacto, ‘Erdenebilegism II – Mongolia’s Next Corruption Episode’ (Jargal DeFacto, 8 April 2019) https://jargaldefacto.com/article/erdenebilegism-ii-mongolia-s-next-corruption-episode?lang=en accessed 18 June 2022.

143 Paul C. Jorgensen, 'Embezzlement' (1987) 24 American Criminal Law Review 513.

144 State v. Fishburn, 656 S.W.2d 879, 881 (1983).

145 United States Code Title 18, Section 656.

146 ibid.

147 US Code Section 1956 (n 33).

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Section 1956 is a “knowledge offense”, so knowing about the client’s criminal activity is a necessary element.148 What is needed, is either the specific intent to promote the unlawful activity or knowing about the illegal purpose of the transaction, which significantly reduces the scope of the provision.149 The main hurdle regarding such a requirement is temporal in nature. At the time when the transaction took place, there is no evidence that Baker knew about the illicit origins of the funds involved in the transaction.

Section 2 of Title 18, contains the aiding and abetting provision to these crimes.150 All those individuals who aid, abet, counsel, command, induce, or procure in the commission of an offense against the United States, are susceptible to be punished as principals.151 Giving advice to an individual or entity regarding the commission of a crime, would suffice.

The three necessary elements for this offense, are: an individual with an apparent connection to the criminality involved; knowing participation of this individual in this criminal endeavor;

and that by his actions, the individual wanted the endeavor to succeed.152 Just as under the auspice of the previous provision, we need the lawyer to know about the specific offense, and would intentionally want to contribute to it153, which we have no evidence for. So even if the lawyer is present at the “scene of the crime”, and possesses knowledge regarding a crime to be committed, this would still prove to be insufficient to find liability. Even if Baker

McKenzie was aware of the “illegitimate reason behind the transaction”, or the illegitimate source of funds involved therein, this would still not make it criminally liable.

It is worth mentioning that for an accomplice crime, we also need a separate, “principal crime” committed, which the individual assisted.154 In the given scenario, half of the acquisition price, as subsequently established, was financed by an unlawful activity ( diverting public funds, fulfilling the crime of embezzlement), which would be sufficient to establish the crime of money laundering. As previously noted however, Baker McKenzie had presumably no knowledge about this at the time being and couldn’t technically “assist to it”.

148 John K. Villa, ‘A Critical View of Bank Secrecy Act Enforcement and the Money Laundering Statutes’

(1988) 37 Catholic University Law Review 489, 496.

149 ibid., 497.

150 US Code Section 2 (n 34).

151 ibid.

152 ‘Aiding and Abetting in Violation of 18 U.S.C. Section 2’ (Brown.PC) https://www.browntax.com/tax-law- library/criminal-tax-charges/aiding-and-abetting-in-violation-of-18-u-s-c-section-2/ accessed 11 May 2022.

153 Rosemond v. United States, 572 U.S. 65 (2014) 77-78.

154 ‘Aiding and Abetting in Violation of 18 U.S.C. Section 2’( n 152).

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From the evidence available, we can see a willfully blind Baker McKenzie, consciously disregarding all the appearing red flags, rather than one which would “embrace the crime of another and consciously do something to contribute to its success”.155 “Mere association”

with the criminal, is not enough to find liability.156 So even if Baker McKenzie was in an advisory relationship with the perpetrators, that does not render it liable.

To summarize, if a legal professional, with the advice it provides to its client, facilitate the commission of such criminal act, depending on the knowledge it possesses, may become an accomplice to the offence.157

Here, criminality originates from the question of what type of legal advice is offered by the lawyer, and whether criminal activity derives from it?158

Despite the difficult prosecution of lawyers in their complicity to financial crime, certain positive examples nevertheless exist.

One of them is from the United Kingdom, where local authorities managed to “pierce the corporate veil” of a business entity and held accountable the corporation itself for the

activities of its employees, the lawyers.159 This type of attribution nevertheless needed proof on the involvement and awareness of senior members.160 Senior partners from the American Baker McKenzie headquarters, had presumably no knowledge of any unlawful activity.

A British legislation, introduced in the 2017 supports such endeavors by helping to find liability of entire corporations (law firms) which failed to prevent their employees, or persons associated with their activities ( the professional legal enablers) to facilitate financial

crime.161 The Corporate Criminal Offence crime, introduced in the Criminal Finances Act,162 although was dealing with tax crime, in my opinion, its provisions could also be used for the facilitation of money laundering, as just like the crime of tax evasion, complicity to money laundering also generally remains hidden, because of the size of the corporate entities, and

155 Congressional Research Service, ‘Accomplices, Aiding and Abetting and the Like: An Overview of 18.

U.S.C. § 2’ ( last updated: 14 February 2020) 3.

156 United States v. Tanco-Baez, 942 F.3d 7, 27 (2019).

157 FATF, Guidance for a Risk Based Approach - Legal Professionals (FATF 2019) ( FATF Lawyer Guidance).

158 Organization for Economic Co-operation and Development, Ending the Shell Game:

Cracking down on the Professionals who enable Tax and White-Collar Crimes (OECD 2021) ( OECD Professional Enablers).

159 ibid.

160 ibid.

161 ibid.

162 The United Kingdom Criminal Finances Act 2017 (Criminal Finances Act).

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individuals involved. Also, both crimes have a clear transnational nature, and often appear in the workings of multinational corporations. This offense represents a due diligence approach, where if a person associated with a corporation commits tax evasion, the corporation is held liable. Unless of course, the corporation could prove that it had in place prevention measures, reasonable at the time being, or that there was no need to have such measures in place at all.163 Under the scope of this offense, it is not necessary that the person associated with the corporation commits it by itself, but it can also “aid, abet, counsel, or procure” in its

commission.164 As previously established, simply be the nature of their profession, lawyers are easily susceptible to the risk of money laundering and being used for this purpose.

Corporations as Baker McKenzie on the other hand, are especially hard to find liable under financial offenses, as often it is onerously difficult to “pinpoint” anyone within the law firm who actually procured or assisted in the offense. The lack of due diligence measures in place would justify a development in legal entity regulation, if they did not have the necessary measures in place, incentivizing criminal behavior.

Even more interestingly, the Criminal Finances Act also criminalizes the crime of tax evasion, if committed abroad, and if the corporation had a certain connection to the United Kingdom (like being incorporated in the UK, or conducting its business, or at least part of it there),165 which would be a perfectly adaptable formula to the regulation of Baker,

conducting its activity both in the United States, and in other jurisdictions. This means that with a similar money laundering provision, it would be possible to prosecute money laundering crimes taking place in a foreign country, if it has certain connection to the US.

Such an offense could also incentivize a more transparent, and legally compliant corporate culture, by putting in place necessary structures, and CDD mechanisms for preventing criminal activities, through strict liability.166 This precisely means that if the firm cannot prove that in order to prevent the facilitation of financial crimes, it actually put in place necessary and reasonable preventive procedures, or if it cannot argue that it wasn’t reasonably expected under the circumstances to have them, it will be held liable.167

163 ibid., para 45(2).

164 ibid., para 45(5).

165 ibid., para 46.

166 OECD Professional Enablers (n 158).

167 Criminal Finances Act (n 162) art.45(2) .

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