The EU has produced a draft Second Money Laundering Directive. In this article, WMLR examines one narrow aspect of the existing Directive and the manner in which is was implemented within UK Law, and then examines the manner in which the proposed Second Directive may have a negative impact on the UK's law.

The European Union's Money Laundering Directive of 1991 required member governments to bring forward legislation to ensure that financial services organisations put in place systems to prevent money laundering. The requirements were:
* to create and maintain systems to identify those with whom the organisation does business;
* to train staff in the detection of money laundering;
* to report to the authorities any suspicion of money laundering;
* to keep confidential the fact that an investigation into money laundering may be conducted (including ensuring that there is no disclosure to the customer);

In addition, there was a requirement that regulators making inspections of regulated businesses make reports to the authorities if an inspection results in suspicion of money laundering by the business.

The Directive required the legislation to apply, as a minimum, to credit and financial institutions. Credit institutions are defined in Directive 77/780/EEC as amended and includes branches within the EU, even though the head office may be located in a third country. Financial Institutions are defined as those undertaking business of the sort set out in various parts of a list annexed to Directive No. 89/646/EEC or an insurance company authorised in accordance with Directive 79/267/EEC, as amended.

In addition, Article 12 of the 1991 Directive requires member states to ensure that the provisions of the Directive are extended, "in whole or in part, to those professions and categories of undertaking that engage in activities which are particularly likely to be used for money laundering."

The UK brought the Directive into effect in secondary legislation, called "statutory instrument" (akin to an executive order): The Money Laundering Regulations 1993, which came into effect on 1 April 1994.

The 1991 Directive required the identification of customers "when entering into business relations, particularly when opening accounts or savings accounts, or when opening safe custody facilities."

The UK's Regulations define the businesses that must comply and a list at Regulation 4 includes, inter alia, persons (both natural and legal) who are conduct investment business within the meaning of the Financial Services Act 1986.

The Financial Services Act 1986 was, at the time it was brought into law, widely regarded as one of the worst drafted pieces of legislation in the history of legislative drafting. To find anything in it, it is necessary to make a series of cross-referrals. "Investment business” is defined in s1 of the 1986 Act as "the business of carrying on one of more of the activities which fall within the paragraphs in Part II of [Schedule 1 to the Act] and are not excluded by Part III of that Schedule." Schedule 1. Part II defines lists the activities as dealing in investments, arranging deals in investments, managing investments, investment advice, establishing etc. collective investment schemes.

The list of exclusions under Part III is long and the exclusions themselves are subject to considerable definition and derogation. It is not appropriate in a paper of this nature, to discuss at length the definitions of the excluded activities, but the list includes (but is not limited to) dealing as principle, acting in a group or joint enterprise, selling goods and services, dealing in the shares of a private company (but this is subject to considerable derogation) and advice given in the course of profession or non-investment business (again, subject to considerable derogation).

The Law Society of England and Wales has, ever since the passing of the Financial Services Act 1986 been a Self Regulatory Organisation under that Act, and has taken a very robust view of whether Solicitors are financial services businesses. The position has been taken that solicitors, unless they do no business involving property, finance or commerce related work, cannot avoid registration. In addition to being the Self Regulatory Organisation (SRO) for solicitors, the Law Society of England and Wales is the solicitors Regulator (through its Office for the Supervision of Solicitors - the OSS) and the "trade union" for solicitors.

The OSS has, since 1994, taken the view that, by reason of the above (admittedly complex) series of links, solicitors must comply with the Money Laundering Regulations 1993. The trade union part of the Law Society has consistently failed to acknowledge the duty, accepting only that solicitors are subject to a duty to make reports of suspicions of laundering of money resulting from drugs trafficking and terrorism (a duty imposed by The Criminal Justice Act 1993, that exported provisions into other legislation, some of which has, subsequently, been replaced but the substantive provisions remain similar.

The attitude of the trade union part of The Law Society may, in significant part, explain the fact that the number of suspicious activity reports from solicitors is regarded as far too low given the exposure of law firms to the activities of criminals. Certainly, the there has been a consistent message that the Money Laundering Regulations do not have general application to solicitors. In 1997, the Law Society reported that "most solicitors' firms in the City now have anti-money laundering procedures in place." This was an astonishing admission that at least some City firms has taken some three years to come into compliance and that the Law Society was aware that there were still firms which did not comply. In 1999, the Law Society again implied that compliance was largely voluntary with the comment that the second European Directive would "bring law firms within the net."

In fact, the Draft Second Directive will create a duty on member states to bring law firms within the compliance systems, but, in this narrow regard, this will add nothing (with the possible exception of an unequivocal statement) to the current position. Notwithstanding this, there is one aspect of the draft Second Directive that, if pursued as currently drawn, risks reducing the effectiveness of the UK Law.
Under UK Law as presently drafted, any person who becomes suspicious that a transaction may be laundering, has a duty to report it to the police. That duty is limited to cases where it is suspected that the laundering is the laundering of the proceeds of drugs trafficking or terrorism and is provided for in the general law. The Money Laundering Regulations 1993, Regulation 14 require the creation of a system, within the regulated organisation, to permit the making of internal reports of suspicion of money laundering. It is important to note that the laundering to which this report refers is laundering of any proceeds of any offence, and is not limited to drugs or terrorism related money. Thus, it is not necessary for the front line staff who gains a suspicion to make any decision as to what he or she is suspicious about. Further, at Regulation 14(d), the person to whom reports are made must decide if there is in fact knowledge of suspicion of laundering and, if so, make a report to a constable.

There are two especially significant factors about Reg. 14(d) - the duty to report, by a financial business, is a duty to report regardless of the nature of the offence producing the assets and the report has to be made to a constable. This means either a policeman or an officer of Her Majesty's Customs and Excise. By definition, therefore, a solicitor who refers his suspicion to The Law Society, in its function as his regulator, does not comply with the law, and commits an offence.

The draft second directive, in its preamble opens the way for the weakening of that currently strong position by creating the opportunity for The Law Society of England and Wales, which has demonstrated a willingness to undermine the clear wording and intent of the legislative provision, to interpose itself between the practitioner and the police.

In the submission of this paper, this would be a seriously retrograde step.

The Preamble to the Second Directive says "…Member States would be given the option of allowing lawyers to communicate their suspicions of money laundering by organised crime not to the normal anti-money laundering authorities but to their bar association or equivalent professional body."

There are several points to make about this, with specific regard to the law in England and Wales. First, the current UK legislation is not restricted to the reporting of suspicions relating to organised crime. Secondly, the placing of a further level of discretion between the practitioner and the investigatory authorities. Third, the creation of the Financial Services Authority (FSA) will, over the next few months, create several confusions, not the least of which is that the supervision of solicitors for investment business purposes will probably move from the OSS to the FSA. The OSS has, in fact, been active in monitoring compliance by solicitors with the 1993 Regulations. The FSA will be taking over the monitoring of solicitors' firms for the first time and will be looking at only one aspect of their practice. The OSS looks at the financial affairs of the firm in the round. The FSA will have a limited brief, but powers that in fact enable it to fully perform (with one exception) the regulatory function with regard to solicitors, insofar as the financial affairs of the firm and its clients are concerned. The one exception to the powers are that it will not be able to discipline for breaches of the Solicitors' Rules, but only for breaches of the Solicitors' Investment Rules.

The danger of the Directive, if adopted in the UK in its current form, and if the UK implements the option to permit suspicious activity reporting to a regulator, is that Solicitors with two regulators will have to be directed as to which regulator to choose and, worse, the financial services sector then becomes its own repository for information. Case workers will decide which cases should be referred to the police and that will leave the National Criminal Intelligence Service (where all such reports currently eventually arrive) at risk of receiving an incomplete picture.

Accordingly, this paper argues that the current UK law should not be amended to take account of that aspect of the Second Directive and that the UK should seek amendment of the draft to provide for reports to the Financial Investigation Unit in each state ( or its equivalent) and not to permit the interposing of a third party, regulator or otherwise, between intelligence agency and practitioner.
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