Where Attorneys Connect to Money Laundering Typologies
April 14th, 2017
The following is part of on-going series of articles which examines the role of lawyers in facilitating money laundering. Start the series here.
The Financial Action Task Force (FATF), an inter-governmental body which promotes measures to combat money laundering and terrorist financing, graded the US on its regulatory framework for AML and terrorist financing in December 2016 for the first time in 10 years. The report gave the United States credit for many of its efforts, but a number of deficiencies led to the general impression that the US flunked. And lawyers were highlighted in many of the US’s failures.
The recurring theme among the FATF’s criticisms was that lawyers, along with accountants and other company service providers who facilitate access to financial services, are not subject to comprehensive AML requirements and are not systematically applying necessary due diligence processes.
Lawyers are key players in establishing legal entities and facilitating access and capital transfer. You need not look far for examples of attorney involvement in potential money laundering. Five leading US firms were mentioned by the Department of Justice in the 2016 1MDB scandal because their “interest on lawyer trust accounts” (IOLTA), typically used to hold small sums, were used to launder $1.3 billion in stolen Malaysian government funds.
Doubling-down on the theme, a Texas attorney was convicted in 2016 of conspiracy to commit money laundering by abusing other lawyers’ IOLTA accounts. The conspirator contacted lawyers seeking legal advice and set up small IOLTA accounts, in which forged checks for larger sums were then deposited as the purported proceeds of legal settlements. Eventually the conspirator asked for all of the funds to be sent to the bank account of a shell company.
IOLTA accounts are just one of the typologies which involve attorneys. Money laundering specialists often examine typologies, a fancy word for the methods, techniques and trends in criminal activity. Typologies are important in combating financial crime to better understand how and who to investigate. For example, at NICE Actimize, we examine common typologies to create software analytics and workflows that generate alerts for financial institutions which may ultimately point to firms that that may become intermediaries of illicit funds.
Typologies are also useful as a gap analysis that allows federal and state governments to acknowledge and address these systemic risks. There have been numerous attempts to categorize the gaps managed by the legal profession.
Three years before FATF’s most recent US AML report, the organization issued a comprehensive report which investigated the typographies of money laundering risks in the legal profession globally. The UK Solicitors Regulation Authority (SRA) has also issued reports highlighting risks, including publishing a firm’s client account details on a website or in their initial client engagement letter, which can lead to abuse of the client account and aborted transactions similar to those of the Texas attorney detailed above.
The US government, or at least those politicians politically inclined to consider such issues, has long known of the role in attorneys in money laundering typologies. In 2010 a US Senate subcommittee chaired by Carl Levin published four case studies detailed how politically powerful foreign officials, and their relatives and associates – referred to in international agreements as Politically Exposed Persons (PEPs) – bring funds generated by foreign corruption into the United States.
The subcommittee’s first finding was that attorneys were sometimes key actors in these cases. In particular, they focused on two Beverly Hills lawyers who helped Teodorin Nguema Obiang, the son of the autocratic President of Equatorial Guinea (and the on-and-off again boyfriend of rapper Eve).
Obiang’s lawyers helped circumvent AML controls at US banks by allowing him to secretly use a series of attorney-client, law office, and shell company accounts as conduits for his funds. From 2004 to 2008, he brought over $100 million into the United States using wire transfer systems at just two US banks and used these funds to fund an extravagant lifestyle of yachts, jets and record company memorabilia. The case resulted in the particularly titled civil forfeiture cases, in which the property to be confiscated is deemed the defendant, of US v. One White Crystal-Covered “Bad Tour” Glove and US v. One Michael Jackson Signed Thriller Jacket.
Despite their involvement, each of the lawyers is still permitted to practice law in California. And there has been little movement in the US to further regulate lawyers despite the US subcommittee’s findings. As discussed further in this series, the US legal community has been elemental in keeping this status quo.
No legal or accounting advice is provided hereunder and any discussion of regulatory compliance is purely illustrative. The views expressed herein are the author’s and do not reflect the views of NICE Actimize.