Criminals engaged in money laundering and other sophisticated forms of fraud are increasingly targeting legal professionals. Boase Cohen & Collins Senior Partner Colin Cohen highlights the warning signs for law firms and what they can do about it.
Hong Kong, 1 August 2018: A report issued last week by the legal profession’s regulator in the United Kingdom made for sobering reading. Law firms in all jurisdictions, including Hong Kong, should take note.
In its annual Risk Outlook report, the Solicitors Regulation Authority (SRA) said there had been an almost 70% jump in reports of cases of money laundering involving solicitors in little more than a year. Cybercrime and dubious investment schemes involving law firms were also on the rise, the study warned. It said reports of cybercrime were up 50% year-on-year while £20 million of client money had been lost to cybercrime in the past two years. There was £47.5 million worth of reported losses related to dubious investment schemes since 2015.
The SRA said law firms were being “increasingly targeted” by criminals seeking to steal “tens of millions from businesses and the wider public”. An astonishing 70% of all reported cybercrime involved email modification fraud. This occurs where criminals intercept and falsify emails between firm and client, leading to bank details being changed and money being lost.
While the statistics from the SRA were alarming, the report merely confirmed what we have known for some time – that among the myriad challenges facing law firms today, combating money laundering and implementing robust cybersecurity are among the most pressing.
As clients and associates of Boase Cohen & Collins will know, we are a member of Ally Law, the global legal services organisation comprising almost 70 firms in more than 40 jurisdictions. Two months ago, at the Ally Law AGM in London, I gave a series of presentations on anti money laundering (AML) to fellow members. Such was the interest in the subject, every session was fully booked.
Each session started with the basics. What exactly is money laundering and why is it an important issue for law firms? Simply, money laundering is disguising the proceeds of crime and integrating it into the legitimate financial system. Law firms need to be fully aware of this since they are vulnerable to suspicious payments from clients and they may also need to advise clients who receive suspicious payments.
As banks and financial institutions have implemented robust measures to combat illicit financial operations, so criminals are looking for alternatives and law firms are an attractive target. Legal professionals can be essential to a transaction and give it respectability. Typical exploitation of legal services may include misuse of client accounts, purchase of property, creation or management of trusts and companies, managing client affairs and making introductions, undertaking certain litigation, and setting up and managing charities.
The warning signs for law firms are usually clear enough. Overly secretive client(s), a reluctance to meet in person or provide relevant documents, being vague about sources of money, insisting on high-value cash transactions, or clients acting through third parties – all these should set alarm bells ringing.
Muddying the waters, somewhat, is the issue of legal professional privilege. There is sometimes a perception that this enables a legal professional to act for a client who is engaging in criminal activity and/or prevent law enforcement from accessing information. And, indeed, there is significant diversity between jurisdictions in the scope of legal professional privilege.
Putting that aside, it is my opinion that the onus is firmly on law firms to take the safety-first approach. This means following regulatory bodies’ guidelines, carrying out due diligence, establishing proof of legitimacy of funds and maintaining exemplary record keeping. Further, a law firm can nominate one of its senior legal professionals as its designated compliance officer and ensure all staff receive adequate AML training. Certainly, this is our policy at Boase Cohen & Collins, where any suspicious income or behaviour is reported directly to me and all our legal professionals are kept fully updated about AML legislation and reminded of their responsibilities.
In the global fight against money laundering and cybercrime, Hong Kong is very much in the spotlight, given its status as a major financial centre with sophisticated banking services and where it is easy to set up a company. Further, 2018 is a particularly important year for the city. The Financial Action Task Force (FATF), an inter-governmental body which regulates on threats to the integrity of the global financial system, evaluated Hong Kong in 2008 and rated it effective for AML in banking, insurance and securities but weak in non-financial sectors such as buying and selling property. Hong Kong is currently undergoing another FATF evaluation and the Government and Hong Kong Monetary Authority are expected to take a particularly strong line against any wrongdoing in the coming months.
Going back to the SRA’s report, it is worth noting the comments of the organisation’s Chief Executive, Paul Philip: “Our Risk Outlook helps solicitors to respond to the risks we see in the sector, supporting firms and protecting the public. Many of the risks we are highlighting are not new, but none of us can afford to be complacent.”
I would echo his words. As law firms embrace digital technology, so do people with altogether more illegal activities in mind. Vigilance remains the key word.