European Masters Program in Law & Economics

MONEY LAUNDERING: PROBLEMS OF LAW

ENFORCEMENT

Masters Thesis Written by

Salman Choudhry

University of Rotterdam

Supervised by

Prof. Alessio Pacces

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Authorship Declaration

I hereby declare and confirm that this thesis is entirely the result of my own work except
where otherwise indicated. I gratefully acknowledge the supervision and guidance I
have received from Prof. Alessio Passec.

Date: 9.8.2007 Signature: ________

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Acknowledgement:

I wish to extend my sincere appreciations and gratitude to Mr. Alessio Passec for his
guidance and help in writing this thesis. He provided me with all the help in collecting the
relevant material for my research. He also guided me and gave me the correct approach to
identify the relevant issues. I am also grateful to Dr Hans Bernd Schaeffer for his support
and faith in my abilities. He is an excellent teacher and I learnt many new concepts from
him.
I dedicate this paper to my wife Maryam Salman for her faith in me and support.
This paper would not have been possible without her support.

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TABLE OF CONTENTS

1. INTRODUCTION:.....................................................................................................................................5
1. 1 WHAT IS MONEY LAUNDERING?................................................................................................................5
1.2- STAGES OF MONEY LAUNDERING:............................................................................................................6
1.3- MONEY LAUNDERING IS ALSO CRIMINAL:................................................................................................7
1.4- WHAT IS WRONG WITH MONEY LAUNDERING?.........................................................................................8
1.5- WHO PROVIDES THESE SERVICES?............................................................................................................9
2. ANTI MONEY LAUNDERING REGIME..........................................................................................11
2.1- THE ANTI MONEY LAUNDERING LEGAL REGIME (AML):......................................................................11
2.2- THE NEW AML:......................................................................................................................................13
3. THE GATEKEEPER..............................................................................................................................15
3.1- GATEKEEPER DEFINITION:.......................................................................................................................15
3.2- ELEMENTS OF GATEKEEPING:..................................................................................................................16
3.3- COST OF GATEKEEPERS:.........................................................................................................................18
3.4- EFFECTS OF COSTS ON GATEKEEPING:....................................................................................................19
3.5- GATEKEEPER’S COSTS AND ENFORCEMENT:...........................................................................................19
3.6- GATEKEEPERS AND DETERRENCE:..........................................................................................................20
3.7- GATEKEEPERS AND REPUTATION:...........................................................................................................22
3.8- POLICY IMPLICATIONS:............................................................................................................................22
4. LAWYERS AS GATEKEEPERS..........................................................................................................23
4.1- FUNCTIONS OF AN ATTORNEY:................................................................................................................24
4.2- DUTIES OF AN ATTORNEY:......................................................................................................................26
4.3- DO WE NEED LAWYERS AS GATEKEEPERS?.............................................................................................28
4.4- DO THE LAWYERS MEET THE FOUR CONDITIONS OF GATEKEEPERS?......................................................29
4.5- CONCLUDING REMARKS:.........................................................................................................................30
5. EU AND GATEKEEPER INITIATIVE...............................................................................................32
5.1- THE STATUS OF LEGAL PROFESSION IN THE EU:....................................................................................33
5.2- OVERVIEW OF THE SECOND DIRECTIVE:................................................................................................33
5.3- EXEMPTIONS FOR LAWYERS:..................................................................................................................35
5.4- INDEPENDENT LEGAL PROFESSION:.........................................................................................................36
5.5- REPORTING AUTHORITIES:......................................................................................................................36
5.6- EXCEPTIONS:...........................................................................................................................................37
5.7- STANDARD OF KNOWLEDGE:...................................................................................................................37
5.8- CAPACITY BUILDING:..............................................................................................................................38
5.9- PROSECUTION OF LAWYERS FOR MONEY LAUNDERING OFFENCES:........................................................38
5.10- THE THIRD DIRECTIVE:.........................................................................................................................39
6. DUTIES OF LAWYERS AND GATEKEEPER (INITIATIVE) LIABILITY:.................................40
6.1- THE DUE DILIGENCE OBLIGATION:........................................................................................................40
6.2- INDEPENDENCE OF THE ATTORNEY:.......................................................................................................42
6.3- FATF AND GATEKEEPER INITIATIVE:......................................................................................................44
6.4 GATEKEEPER INITIATIVE AND US:............................................................................................................45
7. CONCLUSION:......................................................................................................................................46
8. BIBLIOGRAPHY:....................................................................................................................................48

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 1. INTRODUCTION:
Money laundering has become as a major threat to states, facilitated by the deregulation of

capital controls and the liberalization of global finance. It has been called as a “dark side”

of globalization, money laundering has been recognized as the lifeblood of transnational

criminal networks, including drug smugglers, terrorist and human trafficking groups,

corrupt government officials and established corporations also launder money to hide

public capital, circumvent currency controls, bribe prospective clients, and defraud

shareholders. In the modern context it has become an international phenomenon and is like

a virus which afflicts the modern world economy. The term “money laundering” was first

used by United States law enforcement agencies referring to Mafia ownership of

Laundromats1. During the 1920s and 1930s the Mafia was engaged in acquiring legitimate

laundry business with illegal money made from bootlegging, gambling and prostitution.

The illegal money or “dirty money” was mixed with legal money made from operating the

legitimate laundry business to “wash” the dirty money and making it look like clean and

thus legitimate. Over the years this process has become ever more sophisticated and

refined. This acronym has become a term which is now used to define the process of

concealing illegitimate money from the government.

1. 1 What is money laundering?

This is a process by which criminal assets are converted into assets which cannot be traced

back to the illegal activity. It is defined by The FATF as:

1
Money Laundering: An Investigatory Perspective, David A. Chaikin 1991.

5
 “The conversion or transfer of property, knowing that such property is derived from

a criminal offence, for the purpose of concealing or disguising the illicit origin of

the property or of assisting any person who is involved in commission of such an

offence or offences to evade the legal consequences of such actions; the

concealment or disguise of the true nature, source, location, disposition, movement,

rights with respect to ownership of property, knowing that such property is derived

from a criminal offence; [and] the acquisition, possession or use of property,

knowing at the time of receipt that such property was derived from a criminal

offence or from an act of participation in such an offense.”2

Money laundering is a derivative crime and originates with the activities of organized crime

groups. The basis aim of these groups is to conceal huge chunk of money which they make

through their activities and legalize such proceeds. This is not only confined to criminals in

the conventional sense but also white collar crime in big corporations, corruption by

political and public servants and now terrorists are also involved.

1.2- Stages of Money Laundering:

Money laundering is conventionally divided in three processes.

1.2.1- Placement:

The first step is to place funds made from illegal means in a safe place through

which the funds can be brought back. This may involves opening up a bank account with a

fictitious name.

1.2.2- Layering:

2
Financial Action Task Force, quoted by Kern Alexander, “The International Anti-Money Laundering
Regime: The Role of the Financial Action Task Force,” Journal of Money Laundering Control, Vol.4, No.3
(2001), p.233.

6
 Secondly, layering these funds in such manner which can conceal the funs and

ultimately make it too hard for anyone to know from where this money has come. This may

involve a series of complex series of transaction which ultimately dries up the trail of the

source of the money. This may involve the international financial system by moving money

from one jurisdiction to another.

1.2.3- Integration:

Thirdly, integrating the funds obtained into the mainstream economic system. This

may involve buying of genuine real estate or property or even creating business. This is

where the money launderer can actually use his funds.

1.3- Money laundering is also criminal:

There is no universal or comprehensive legal definition of money laundering. Legal

systems have their own definitions based on different priorities and objectives. At the

international level United Nations treaty has declared money laundering a universal

offence3. A very specialized International Financial Action Task Force (FATF) was

established by G7 group in 1989. This group also concluded in 1990 money laundering as

an offence and urged all countries to include such an offence in their legal systems:

“an alternative approach is to criminalize money laundering based on serious

offences, and/or on all offences that generates a significant amount of proceeds, or

on certain serious offences”4.

It is important to note that there is no universal definition available for money laundering

other then given by UN. Jurisdictions all over have their own version of the definition and

3
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, Art 3(1) (b), U.N. Doc.
E/Conf.82/15 (1988).
4
Financial Action Task Force on Money Laundering, Report (1990).

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to an extent that is closely linked and based on the definition given by UN. It defines

money laundering in more or less simplistic legal context to mean

“the conversion or transfer of property knowing that such property is derived from

an offence, for the purpose of concealing or disguising the illicit origin of the

property, or of assisting any person who is involved in the commission of such an

offence to evade the legal consequences of his actions. In other words, it is the

concealment or disguising of the true nature, source, location, disposition,

movement rights with respect to or ownership of property, knowing that such

property is derived from an offence”5.

It is also declared as a predicate crime which is the back bone of the organized

crime and has taken shape of endemic.

1.4- What is wrong with money laundering?

In short money laundering is mainly done by the organized criminal groups and it is an

important exercise for the very existence of these groups. In other words it is provides the

incentive to the organized criminals to carry on their activities. It allows and facilitates

these groups to enjoy the fruits of their criminal activities and finances their future

existence. As the whole process is carried out in a clandestine manner it saps the strength of

the regular economy. Lot of research has been carried out on this subject and it has been

supported by empirical data. However, from and economic point of view money laundering

has three fold effects on an economy. Firstly, it erodes the financial institution itself through

which money is being laundered6 by destroying its internal control mechanisms and

5
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, Art 3(1) (b), U.N. Doc.
E/Conf.82/15 (1988). For more detail see UN Global Programme against Money Laundering, UN office for
Drug Control and Crime Prevention (UN-ODCCP) Vienna, Austria, 1991.
6
The Negative Effects of Money Laundering on Economic Development, Brent L. Bartlett. Asian
Development Bank May 2002.

8
reputation. Second, it creates an incentive for engaging in criminal activity as the reward is

considerably higher then expected. Thirdly, it damages the confidence on the economic

system on the whole. I would not be discussing the impact of money laundering on the

economic system, need less to say it has a negative effect on the economy.

Money Laundering is also immoral as money is generated mainly through criminal

and immoral trades to engage and finance activities like drugs, arms trafficking, trade of

human organs, and trade of endangered species, human smuggling and terrorism 7. The

governments all over the world are facing these stark realities and the menace is ever

stronger and in potent.

1.5- Who provides these services?

These services can be provided deliberately or without knowledge. As the criminal groups

want to use the financial institutions it is the first step where bankers can provide them with

assistance. This can be of immense help to them as the first step in laundering “placement”,

require their assistance. An insider can make this task easy by cooperating either through

coercion or for a benefit. Forms can be filled easily and all the legal requirements for

operating a bank account can be easily met.

Lawyers are also important in this game. A lawyer can provide legal assistance,

advice, even open bank accounts or shell companies in their names. In the event of an

investigation client privilege can be invoked to halt these investigations 8. Other

professionals include accountants, financial advisers, stock brokers, real estate agents and

notaries.

7
Moises Naim The Five Wars of Globalization, Foreign Policy, No. 134 (Jan-Feb, 2003), pp. 28-37.
8
Michael Levi and Peter Reuter, Money Laundering, Crime and Justice Vol. 34 2006. pp 289-375. p 316.

9
 It is here the fight against money laundering is weakest and poses a challenge for

the regulators. The aspect has not gone unnoticed and has been given the due consideration

by the policy makers. These professionals are known as “gatekeepers” and they are the first

line of defense against the attack by the money launderers. The G8 countries recognized

this at one of their ministerial meeting on combating “Transnational Organized Crime”,

held October 19-20, 1999 Moscow and gave the idea what is known as “gatekeeper

initiative”9. The actual text is:

“to consider putting certain responsibilities, as appropriate, on those professionals,

such as lawyers, accountant, company formation agents, auditors, and other

financial intermediaries who can either block or facilitate the entry of organized

crime money into the financial system”10.

The FATF has also lent its support to this initiative and has incorporated it in the

revised so called “Forty recommendations” issued in May 2002 11. The revised

recommendations for this purpose are recommendation 12 which requires due diligence and

record keeping requirements for the lawyers and the other professionals. Recommendation

16 further provides that lawyers should also be subjected to suspicious activity report which

is already imposed on the bankers.

My emphasis would be to explore this initiative. I would be discussing in the next

chapter the conceptual framework for the Anti Money Laundering Regime and what

provisions are important for this initiative. In Chapter 3 I would discus the concepts of

gatekeepers and the requirements for a gatekeeper. In chapter 4 I would address the
9
Kevin L. Shepherd, USA PATRIOT Act and the Gatekeeper initiative: Surprising Implications for
Transactional Lawyers. Probate & Property Sept/Oct 2002. pp 27.
10
Communiqué available at http://www.library.utoronto.ca/g7/adhoc/crime99.htm
11
The first “Forty Recommendations” were adopted in 1990 and they were revised in 1996. In May 2002
FATF issued another revised version which was debated upon by the member countries and was officially
adopted in June 2003, Berlin. The 1996 and 2003 can be compared at http://www.fatf-gafi.org/40Recs_en.htm
and http://www.fatf-gafi.org/40Recs-1996_en.htm

10
question can lawyers be gatekeepers. In Chapter 5 I would discuss the new EU Directives

on this issue. In Chapter 6 I would some important duties of attorney like confidentiality

and legal privilege. Finally I would give my conclusions.

2. ANTI MONEY LAUNDERING REGIME

International cooperation is an important corner step to build the regulatory and legal

framework for an effective answer to money laundering all over. In times of globalization

of financial markets and close links between markets, domestic measures would not suffice.

It has to be a coordinated and well planned international effort where all municipal

jurisdictions accept the international law and will. Experience and studies have shown that

if there are loopholes in this order money laundering would be very easy12.

2.1- The Anti Money Laundering legal Regime (AML):

The Anti Money Laundering (AML) Regime is the process which prevents and aims to

prevent money laundering from happening. Since the 1980s the world has seen an

extraordinary growth in the efforts to control this menace. The measures adopted include

freezing of suspected assets, confiscation of proceeds of crime. The current AML regime is

joined by an array of international institutions and international agreements. It is based on

two pillars.

12
Take the example of the so called offshore bank havens like Cayman Islands, or Caribbean Island. These
places have been labeled as money laundering havens over the years.

11
For simplicity it can be drawn in the following figure:

PREVENTION ENFORCEMENT

CIVIL AND CRIMINAL

ADMINSTRATIVE/ CONFISCATION/

REGULATORY SANCTIONS FORFEITURE

REGULATION PROSECUTION

AND AND

SUPERVISION PUNISHMENT
REPORTING INVESTIGATION
CUSTOMER

DUE PREDICATE

DILIGENCE CRIMES
Fig 1- The AML Regime (source: Reuter and Truman 2004)

The prevention pillar is designed to deter criminals’ form actively using the international

and domestic financial institution for laundering purpose. The enforcement is designed to

punish criminals who are caught in this crime13.

2.1.1- Prevention:

The prevention pillar has four key elements, administrative sanctions, regulation

reporting and customer due diligence. Prevention pillar is of more important for the

regulatory agencies. The emphasis is on building an effective regime which can counter this

13
Michael Levi and Peter Reuter, Money Laundering, Crime and Justice Vol. 34 2006. pp 289-375.

12
menace at the onset. The theory is that requirement to provide information will create a

situation which will deter some criminals to limit their access to the financial institutions.

External supervision requires active monitoring of compliance with principles like

customer due diligence (CDD) or “know your customer”. The sanctions stipulate that

institutions which do not comply with these requirements face penalties.

2.1.2- Enforcement:

The enforcement pillar has also the four corresponding elements, civil and criminal

confiscation, prosecution and punishment, investigation and predicate crimes. It’s the last

element which makes money laundering criminal. The other elements form the process of

investigation which ultimately leads to confiscation and punishment.

The fight against money laundering should begin at prevention level and my

emphasis is on the last two points of the prevention pillar which form the core of the

reporting requirements. This concerns also the “gatekeepers” who are considered to be the

most important persons who can detect the instances of money laundering and are in a

position to stop them or report them to the proper authorities. These include bankers,

accountants, notaries, lawyers and stockbrokers who provide valuable services in

facilitating the movement of cash and also advices which are important to utilize these

funds. There has been an international effort to include these professionals in this fight and

this has been called as “gatekeeper initiative”. As far as bankers, accountants or other

professionals are concerned they are already subjected to the regime of suspicious activity

report (SAR). I am more interested in the role of lawyers who are also gatekeepers and do

provide valuable services.

2.2- The new AML:

13
 With the gatekeeper initiative in acceptance there is a new jump start for the AML.

The desire is to keep one step ahead of the criminals who would be exploiting the loopholes

in the system. This initiative with reference to lawyers is quite controversial and has invited

lots of heated debates in many forums. However we view this initiative it is now part of the

international order and has called upon countries to make their laws in line with this

initiative. It is also now a reality for the EU 14 and other jurisdictions to implement new anti

money laundering systems and procedures. The debated issues concern the client privilege,

client confidentiality and bar associations. My thesis will examine what is meant by

gatekeeper and how effective they are. I would explore the role of the attorney as a

gatekeeper as envisaged by the EU Directives in compliance with the FATF and G8

requirements.

14
See directive 2001/97/EC amending Council Directive 91/308/EEC on the prevention of the use of the
financial system for the purpose of money laundering.

14
 3. THE GATEKEEPER
In this chapter I shall be discussing the conceptual framework of gatekeepers to later on

employ these concepts for further analysis.

3.1- Gatekeeper definition:

Gatekeeping has been significant phenomenon for a log time, it is akin to in old

times being the role of chamberlain in the royal court. It was this man who controlled the

access to the king. He chamberlain acted as a personal servant to the king and also took

care of him. On the same model the modern concept of gatekeepers is defined:

“gatekeepers control access to benefits valued by others who are their clients”.

This definition is given by Mamdi Corra and David Willer (2002)15.

In other words gatekeeper is the one who controls access to services and benefits.

Thus he may be the key person who is important enough not to overlook in constructing a

regulatory framework of any sort. The benefit may be of different nature like access to a

financial market or real market. In this sense the gatekeeper assumes a very important role

and their judgments and advice matters a lot to people seeking it. Like any buyer or seller

the gatekeeper and client may also negotiate but not for ownership but for access which is

being controlled by the gatekeeper.

15
Mamdi Corra; David Willer, The Gatekeeper. Sociological Theory, Vol. 20, No. 2. (Jul., 2002), pp 180-207.

15
 In a seminal article by Kraakman 16 (1986) he discussed the issues of gatekeepers

and gatekeeping. His analysis is based on collateral liability but it is useful for our analysis

also. He describes collateral liability as “gatekeeper liability”:

“liability imposed on private parties who are able to disrupt misconduct by

withholding cooperation from wrongdoers”17. (emphasis added)

It is the ability of the gatekeepers who are in a position to stop or report any

misconduct in the market. In the given regulatory framework there can be two types of

gatekeepers: private and public. It is the role of the private gatekeepers which is of

importance. The gatekeeper liability refers to the process by which the government can

enlist the support and assistance of the gatekeepers by withholding their support to

misconduct and also report this dereliction to the regulatory authorities.

3.1.1- Requirements for a gatekeeper:

Essentially there are two elements of this requirement. First, it is the service which

is required by the wrongdoer. Second, it is the gate which opens to that service and is being

monitored by the gatekeeper, and who can deny that service by withholding his

cooperation. Suppose there is a private lawyer approached by a person who wants to buy

real estate. Let’s assume that the person does not hail from the same country and has no

residence in the country where the lawyer is residing. How well can the lawyer satisfy him

that the money come from legitimate sources is the function of the gatekeeper? A lot of

responsibility lies on the gatekeeper as to open the gate and provide the services for only

legitimate purposes. It is mainly the professionals who are considered gatekeepers such as

bankers, auditors’ security analyst and attorneys.

16
Reiner H. Kraakman, Gatekeepers: The Anatomy of a Third Party Enforcement Strategy. Journal of Law,
Economics, & Organisation, Vol. 2, No. 1 (spring, 1986), pp 53-104.
17
Ibid pp, 53.

16
3.2- Elements of gatekeeping:

In his seminal article Kraakman (1986) listed four characteristics which should be

present to ensure effective gatekeeping. He did not make such explicit distinction but it can

be seen through his article that this liability rests on the following four parameters.

3.2.1- Is there a willingness to monitor?

In theory it is said that the gatekeeper must close the gates when he detects that

there is a hint of misconduct. The important question is that how would he know that? He

calls the gatekeepers as “cops on the beat”18 Kraakman (1986) (pp 53), so just like a cop he

is required to send resources on acquiring the requisite information. He must keep a higher

level of vigilance to detect any dereliction of rules. This is just like a cop on the street who

would move around in his beat and make inquiries on suspected people. The cop on the

street is on the look out for any wrong doing, as he knows if he ignores one dereliction then

he has to face an increased level of misconduct and it would also cost him his job and

possibly his reputation also. The same holds true for the gatekeeper.

3.2.2- Is there willingness to report?

Once the gatekeeper detects such a misconduct it is binding on him to report the

matter to the authorities concerned so that a proper action can be initiated against the

wrongdoer. The willingness comes from sanctions and deterrence measures adopted in the

enforcement policy.

3.2.3- Does he have the capacity to monitor?

The willingness may not be enough to spend resources to find out where and how

the illegal duty is transpiring. He should also have the capacity to monitor, by having access

to the records and data which is important for verifying the information he has. This is what

18
Ibid pp 53 and see supra note no 1.

17
the regulatory authority should provide him with. His willingness and capacity to monitor

would be an effective enforcement policy.

3.2.4- Does he have the capacity to report?

There must be capacity to report the misconduct. In other words if there are ten

gatekeepers one or two may be willing to report would everyone do the same if they

encounter the same situation. In one example 19 Kraakman calls ten night club as

gatekeepers. If one club turns down underage teenagers would the remaining nine clubs

follow suit. The enforcement policy should ensure that the other nine should face sanctions

so that one honest gatekeeper should not suffer.

3.3- Cost of Gatekeepers:

Another point to address is that can the legal rules induce the cooperation from the

gatekeepers at an accepted price to the gatekeepers. He has listed three costs for the

gatekeepers20. These costs result due to the scope of the duty and sanctions involved with

them.

3.3.1- Administrative Costs:

These costs refer to the costs incurred in policing the gatekeepers by the regulatory

authorities. They may be high and low depending on the size of the authority. These costs

do not figure in the costs for the gatekeepers but indirectly do affect the performance.

Given the fact that if these costs are high and are spent where they should be the

19
Ibid pp 73.
20
Ibid pp, 75.

18
gatekeepers would be more vigilant. However this matter is another matter and does not

concern us here.

3.3.2- Private Costs:

These costs include the performance costs, costs of searching and verifying and in

case there are legal implication these costs are also included. These costs are reflected in

the fee charged by the gatekeeper for his service. If the gatekeeping duties are sharply

defined it may lead to higher fees. This may also lead to misconduct.

3.3.3- Tertiary Costs:

These costs refer to the activities which might be undertaken due to the nature of

gatekeeping duties. In other words tighter duties means hat cost of business would also

raise and it may increase the incidence of misconduct also21.

3.4- Effects of costs on Gatekeeping:

It is suggested that a very delicate balance has to be made for an effective

enforcement strategy. The duties which are very tight or sharply focused lead to higher fees

charged by the gatekeepers. This leads to increased incidence of misconduct. This may also

lead to a situation where there is always a compliant gatekeeper who may help the

wrongdoer. If the duties are not that focused then it resembles like a tort system with its

standard of care. There is always a possibility of setting standards by the court at incorrect

levels and resultantly the penalties may be set at wrong levels. Either they may be too high

or too low. In this situation when the monitoring responsibility is being tested against a

strict liability standard the gatekeeper may be penalized for even trivial mistakes and this

would push the performance cost.

21
Ibid pp, 75.

19
3.5- Gatekeeper’s costs and enforcement:

It is the performance costs which are important for smooth functioning of a market.

This is also important from an enforcement purpose, as the performance costs would be

well spent so long they reduce the total social cost of misconduct 22. Having said so the

gatekeeper may find it difficult to operate if the performance costs are too high, this would

always lead to higher levels of misconduct. In the other scenario instead of curbing money

laundering it would do nothing to stop it.

On the same tone the gatekeepers also face an impeding possibility of legal actions

in case their assessment is wrong. Given the fact there is a limited capacity to monitor and

sharply defined gatekeeping duties the risk of legal action would always loom and it would

also push the performance costs. Similarly he tertiary costs would also be affects as it

would also face he same possibility. The tedious requirements may mean that there would

always be jurisdictions with less tight regulations thus facilitating the incidence of money

laundering23 which is what is the loose end in the enforcement of AML.

3.6- Gatekeepers and deterrence:

The gatekeeping strategy could only work better if direct enforcement does not

yield good result and also if they are more costly. On the other hand raising penalties

against wrongdoers and also increasing liability and duties could become costly for both

direct and gatekeepers enforcement.

For this purpose I have made use of the analysis given by Kraakman (1986) to show

on the graph. Let us suppose that there is no liability imposed on either the wrongdoer or

the gatekeeper. In that case the there will be n offences and n purchases as shown on the

22
Ibid pp, 76.
23
See the report of FATF report on non compliant countries 2002.

20
figure 1 below. The demand curve D (notation added) represents the demand for compliant

gatekeepers. Lets suppose that the lawmakers impose an expected penalty f, this would

affect the expected returns on misconduct and shift the demand curve for corrupt

gatekeepers downwards to D’. Thus wrong doers would make m purchases and commit m

offenses. So the direct penalties can only deter n-m offenses, this is where the lawmakers

would introduce the gatekeeper liability g to prevent additional wrongdoing. This is based

on the assumption that gatekeepers can detect all wrongdoing, and this is termed as:

“good news/bad news assumption” by Kraakman (1986) pp 8824.

The good new is that the gatekeepers can detect all wrong doings and the bad news

is that wrong doers can relocate their operations somewhere else. The discussion till here

supports this argument that in case the gatekeeper liability is set too high or not set

optimally the money launderer would definitely relocate and shift his operations

somewhere there is more compliant gatekeeper. The gatekeeper would face an expected

liability of g-f, so the gatekeeper would supply their services higher then g-f. This would

also result in the fall of offenses by an additional m-l.

24
Reiner H. Kraakman, Gatekeepers: The Anatomy of a Third Party Enforcement Strategy. Journal of Law,
Economics, & Organisation, Vol. 2, No. 1 (spring, 1986), pp 53-104. The graph has been used for the analysis
of corrupt gatekeeper. I have modified it to use for the general idea that gatekeeping would result in fall of
offences.

21
 This analysis can also be used to understand the interaction of direct enforcement

and gatekeeper liability. As the figure shows the gatekeepers can influence the conduct of

wrong doers and help in the direct enforcement measures. I would also point out that a joint

optimal strategy is required for an effective gatekeeper regime. This fact is also supported

by the figure 1 and Kraakman (1986)25, that whatever may be the price of gatekeeper, the

gatekeeper strategy would reduce the expected returns on misconduct which is equal to the

shaded area of figure 1.

3.7- Gatekeepers and Reputation:

The gatekeepers also survive in a market where ordinary rules of demand and

supply apply on them. The competition for their services survives in a very tight market

which can be competitive and highly sophisticated also. The most important asset for the

gatekeepers is their reputation which would buy them their business and also determine

25
Ibid pp 88.

22
their remuneration. To build this reputation the gatekeeper needs to invest what is sunk cost

and charge a low price until the situation improves and the price can be raised. The

gatekeepers would forgo this reputation only if the gain from misconduct is higher from not

doing so. This is where the enforcement policy would ensure that the penalties are set at

such a level where the gain is not that high.

3.8- Policy implications:

The above analysis supports the arguments that gatekeeper liability is an essential

element of the prevention side of the AML. It is also realized that professionals providing

an array of services are better suited to implement the regulatory and legal requirements at

an exante level. The above discussion supports this argument.

4. LAWYERS AS GATEKEEPERS
The FATF in its 1995-96 report on money laundering typologies 26 noted that

professional money launderers are emerging and are facilitating money laundering. The

report observed the use of attorney’s trust account is being used for placement and layering

of illicit funds. In the same misconduct shell companies, trusts or partnerships by attorneys,

accountants and professionals is also forming and facilitating this misconduct. The report

laid a heavy emphasis on the use of lawyers as conduits in money laundering. This report

climaxed with the inception of the gatekeeper initiative in the G8 Conference in 1999.

As we have discussed that gatekeeper initiative concerns the professionals such as

accountants, bankers and lawyers. The belief is that professionals are in unique position to

observe transaction and detect potential suspicious activity that may lead to money

laundering. This is also cost effective at the exante level. The most important controversy

26
See FATF Report on Money Laundering Typologies 1995-1996.

23
is that these professionals are subjected and committed to confidentiality or legal privileges

which form the core of their professional duties.

In this context it is noted that bankers, accountants and other professionals have

been subjected to some sort of regulatory regime of reporting 27 or to some regulatory

authority28. It was the lawyers who were not subjected to such a regime other then their own

code of conducts issued by their own bars. The bar associations and legal fraternity has

expressed grave reservations on the new gatekeeper initiative sought by the international

body.

4.1- Functions of an attorney:

The attorney occupies an important role and has function in the modern evolving

financial markets. We must look at the function of the attorney to understand why they can

be called as gatekeepers.

4.1.1- They are advocates of their clients:

It is the primary duty of the attorney to represent his client in a court of law and get

justice for him. This concept is also the main pillar of legal system which espouses justice

and upholds all the moral values associated with it. For this purpose he attorney is bound by

the professional ethics and duties imposed on him by the Bar Associations 29. It is also the

primary function of the attorney to represent his client in a court of law and also assist the

27
US Bank Secrecy Act (BSA) of 1970. It also represents the historic starting point for efforts to detect money
laundering although the term was not used back then so commonly. Banks acquired an affirmative duty to
provide information to the Department of the Treasury of transactions more then $10,000 in cash also called
Currency Transaction Reports (CTRs). The BSA criminalized the failure to report such a transaction.
28
For example auditors are regulated by the Public Company Accounting Oversight Board (PCOAB) in US.
29
For example the common law duty of attorney-client privilege. In simple terms this duty protects the
communication between a lawyer and his client.

24
court in the pursuit of law. This role is the cornerstone of the requirements of a legal system

and is protected in the substantive law as a right.

4.1.2- They give legal advice:

This is usually an informed value judgment given by an attorney to his client on a

legal issue or even financial issue. This can be in the shape of writing and greatly

influences the behaviour of the client. The client approaches the lawyer for a legal advice

for a number of reasons ranging from family matters to buying property. In this case it is

the obligation of the lawyer to provide best possible advice and help to his client. However

it is not for the lawyer to assist his client in any fraudulent scheme which may be an attempt

to launder money. This issue is not contended and is settled that the attorney should

represent his client in the interest of justice and also assist the court to deliver justice. This

role is also protected by client privilege and confidentiality. It is not a sole individual as a

client but large corporations also who need legal advice. With the rise of the law firms and

specialist lawyer this advisory function is very important to appreciate and understand. The

globalization of the financial institutions has made it important that clients should seek

legal advice before they make financial decisions.

4.1.3- They help in transactions:

A transaction is an agreement, communication, or movement carried out between

separate entities or objects, often involving the exchange of items of value, such as

information, goods, services and money30. What constitutes a transaction? It concerns 31

broadly as:

 Mergers and acquisitions,

30
Defined at Wikkipedia.
31
Given at the official website of Pricewater House Cooper.
http://www.pwc.com/extweb/service.nsf/docid/de587598c9f67e1685256e6d0051566d

25
  Strategic and valuation advice,

 Growth or divestments and developing exit strategies.

The lawyers are not only important players in assessing the legal validity of these

transactions but also make an important member of the team in these negotiations. Besides

these transactions it also include opening of an account, creating a corporation in offshore

heavens and real estate acquisitions. The FATF has reported that lawyers are increasingly

being used in creating shell corporations which are used as conduits to launder money.

4.1.4- Verification, screening the forms filed by the client:

The lawyers also perform another important task of filing claims or fill tedious

forms on behalf of their clients. This is to open bank accounts or even file tax returns. For

this purpose the lawyers rely on simple legal principle of “due diligence” also known as

“know your customer” in assessing the true identity of their client.

4.1.5- Reporting Obligations:

Besides any regulatory framework the lawyer is generally assumed to report any suspicious

behaviour to the authorities. It is now through the gatekeeper initiative that it is being made

mandatory. However the former is concerned with ethical rules of conduct formed by the

respective bar associations. The lawyer when finds out that there is a tint of dishonesty

involved in the proposal put forwarded by the client should disengage himself from such

endeavor. He should also advise his client about the possible ramifications of the scheme if

put into action. There is no doubt that bar associations view this very seriously and have

made specific code of conducts for such type of behaviors. American Bar Association rules

provide that a lawyer cannot represent a client to advice, engage, or assist in conduct the

lawyer knows is criminal or fraudulent32.

32
James H. Carll, The Duties and Obligations of the Securities Lawyer: The Beginning of a New Standard for
the Legal Profession? Duke Law Journal, Vol. 1975, No. 1. (Mar., 1975), pp. 121-147.

26
4.2- Duties of an Attorney:

To perform their functions the attorneys are subjected to some obligations imposed

on them. They concern their conduct and position in the legal system. These obligations are

time and tested and mainly imposed through substantive law or through the code of

conducts issued by the Bar Associations 33. What then are the privileges afforded to

attorneys to discharge their functions and also abide by their duties?

4.2.1- Legal Privilege:

This privilege protects the information and communication between an attorney and

his client which are made in “confidence” with the attorney for the purpose of obtaining a

legal advice. It should be noted that these communications would be protected even if they

are not connected with litigation in a court of law. This is important because the legal

system depends upon the freedom of communication between an attorney and their clients.

It is a fundamental right and any changes to it must be viewed with caution.

An important point to note is that this privilege is of the client not of attorney, if the

attorney claims privilege he is doing on behalf of his client. An exception is available in

this context that this privilege doesn’t work in case the advice was sought for any criminal

activity. The Bar places heavy responsibility on such lawyers to resist such temptations and

refrain from aiding such schemes.

4.2.2- Confidentiality:

This concept is wider then legal privilege. Information may be confidential even if

not protected by legal professional privilege. It can happen in case of contracts through

33
The code of conducts issued by American Bar Association 1908. For the latest instructions refer to
guidelines issued by the Law Society of UK on money laundering based on the judgment of Bowman v Fels
[2005] EWCA Civ 226.

27
express or an implied term. It can also happen in case of fiduciary duties where in

relationship of trusts the revealing of information may be prohibited.

Both these concepts are distinct but they also overlap. Confidentiality is a necessary

but not a sufficient condition as information should be intended to be confidential in order

to be protected by legal professional privilege. However the mere fact that a

communication was made in confidence may not be protected of legal professional

privilege. The important point is the intention that must be present. However, easier said

then done it is not always easy to decide on what is confidential or is protected by legal

professional privilege. A lot has to depend on the judgment of the lawyer.

In Three Rivers District Council and Others v Bank of England34 the Court of appeal

also confirmed this assertion. It confirmed that legal advice is only protected when

communications between the lawyer and the client is exchanged with a dominant purpose

of enforcing legal rights liabilities and enforceable law. Advice on presentational matters is

not however protected unless it is ancillary to advice on legal rights and liabilities.

4.3- Do we need lawyers as gatekeepers?

After the gatekeeper initiative, a lot of controversy has been raised on implementing

them against lawyers. The main arguments are that the lawyers perform multiple roles and

public policy does not favour such a restriction35.

4.3.1- Multiple roles:

The critics of the argument that lawyers should not be subjected to any regulations

argue that they are performing multiple functions. Looking more closely at this argument it

seems that it may be easier to impose gatekeeper obligations on attorneys because of the

34
[2004] EWCA Civ 218.
35
John C. Coffee, Jr. The Attorney as Gatekeeper: An agenda for the SEC. Columbia Law Review, Vol. 103,
No. 5. (June 2003) pp 1293-1316.

28
exante nature of their role. If the legal advice which is sought by the client is fraught with

illegality the lawyer can very easily detect it and alert the authorities. Furthermore the

modern law firm has also evolved and we are no longer witnessing the days of individual

star lawyers pleading their cases in the court room. The law firms are specialized firms

where there are attorneys who are not only practicing law but are advising clients small and

big in understanding the complex legal systems. The very argument that multiple roles

restricts such liability it turns upside down due to the evolution of the practice of law as

such. There are many other professional who are also performing multiple roles such as

auditors, security analyst, and investment banker. If they can be subjected to the gatekeeper

initiative why the attorneys can’t be subjected also?

4.3.2- Public policy:

The critics also put forward the argument that public policy warrants an independent

lawyer who can better serve the courts and client. If we are going to put restrictions on him

we would be infringing the basic right of the client albeit justice. This argument can also be

used to support the argument for imposing gatekeeper liability to counter money

laundering. It is in the interest of the public to check money laundering trends.

Now I would subject the functions of an attorney to the requirements of identifying

them and calling them gatekeepers.

4.4- Do the lawyers meet the four conditions of gatekeepers?

Now I shall subject the role of attorneys to the four conditions of gatekeeper

discussed in the last chapter.

29
4.4.1- Willingness to monitor:

The lawyers are subjected to an elaborate code of conduct formed by the Bar

Associations and there are severe penalties if the lawyers do not conform to those codes.

This ensures that there is willingness to monitor. A lawyer cannot become an accomplice to

a fraud or misconduct and as soon he comes to know such a travesty is inherent in the

proposals put forward by his client he has to disassociate himself form his client.

4.4.2- Willingness to report:

This is a thorny issue no doubt and it has been subjected to a lot of debates. One

thing which is clear is that the moment the lawyer detects any misconduct he must advise

his client form not pursuing that course of action. He should also ensure that he is not

implicated if despite his warnings his client goes along with his scheme. Should the lawyer

make a “noisy withdrawal”36 or just make a quiet exit. This needs careful reasoning, but

there is willingness to report due to the code of ethics and law37.

4.4.3- Capacity to monitor:

Compared to other professionals the lawyers have the capacity to detect any

violation of law, because of the inherent nature of their profession. However his capacity to

monitor also depends on external factors such as the help rendered by the regulatory

authorities. In case the attorney detects any illegality, in my opinion in the majority of cases

the regulatory authorities are willing to increase his capacity and provide him assistance.

4.4.4- Capacity to report:

The lawyers have the capacity to report any misconduct because they can detect

violations of law better then any other professional. The legal matters can be better

petitioned in front of a regulatory authority and a court.

36
Ibid pp 1302.
37
See for example American Bar Associations Guidelines for attorneys to report and also Proceeds of
Criminal Money Act (POCA) 2003 UK.

30
4.5- Concluding remarks:

This point that is the most debated and controversial is attorney client

communication. For further analysis the starting point is that the client knows little law and

he has to seek the lawyers help in understanding it, what ever his intentions may be. Given

the fact the law is also becoming more complex it becomes all the more important for a

client to seek a lawyers help in understanding finer shades of law. This brings us at the

exante level and imposing gatekeeper liabilities would be socially desirable. It would make

the client obey the law or stop him from any wrong doing or make him find any other more

expensive means of committing his act. The exante measures would also be cost effective

for implementing compliance with law rather then expost measures 38 by investigation and

prosecution.

38
John C. Coffee, Jr. The Attorney as Gatekeeper: An agenda for the SEC. Columbia Law Review, Vol. 103,
No. 5. (June 2003) (pp 1293-1316). pp 1308.

31
 5. EU AND GATEKEEPER INITIATIVE
The Anti Money Laundering legislation was introduced in the US in 1986 39 and in

the EU in 1991 in the shape of a directive 40 (hereafter referred as first directive). These

measures were introduced to reflect an international commitment as evidenced by the 1988

Vienna Convention Against the Illicit Traffic in Narcotic Drugs and Psychotropic

Substances41. These measures were further augmented by the creation of Financial Action

Task Force (FATF) n 1989, which has the purpose of to develop and promote policies to

combat money laundering. It has issued the so called 40 Recommendations to put forward

this view. These recommendations have been updated over the years and have been

endorsed by almost 130 countries.

The money launderers have also been active in bypassing these controls and have

developed new skills and methods for their purpose. The reports issued by FATF on

39
Money Laundering Control Act of 1986.
40
See Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money
laundering.
41
United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances Dec. 2,
1988. Vienna.

32
typologies of money laundering have noticed that these criminals have become involved

with not only drug traffickers but also with other organized criminal groups and terrorist.

The most dangerous trend has been the help rendered by professionals like bankers,

accountants and lawyers to launder money. The FATF recently recommended that lawyers

should also be compelled to join this effort. Despite it being controversial the EU has

incorporated this proposal to be reflected in the second EU Directive 42 (hereafter referred as

second directive) issued.

At this moment US has not made any laws concerning lawyers. My focus would be

on this second directive.

5.1- The status of Legal Profession in the EU:

The market for lawyers in EU is very competitive and they face a stiff competition

from foreign law firms which are mainly US based. The lawyers also face competition from

accounting firms and other service providers working in multidisciplinary services. On the

other hand due to open borders within the EU lawyers are not confined to one jurisdiction

only. Thus the legal sector has also experienced a proliferation of transnational activity and

alliances. The regulation of the legal service provider varies between Member States which

also means that the ethical rules and legal privileges also vary.

When there was indication that lawyers would be targeted to be included in the new

directive the lawyer’s fraternity raised hue and cry and claimed that they should be left

alone on grounds of legal privileges. They also cited other reasons like client loyalty and

confidentiality both is essential for their reputations and represents the trust of the clients on

their abilities. However the lawyers were not singled out for this treatment but over the

42
See directive 2001/97/EC amending Council Directive 91/308/EEC on the prevention of the use of the
financial system for the purpose of money laundering.

33
years they have been identified as playing key role in facilitating money laundering, it has

been evidenced by the reports of FATF on the typologies of money laundering.

5.2- Overview of the Second Directive:

This directive substantially broadens the scope and applicability of the first

directive. This directive applies to professionals and institutions not previously subjected to

such measures. It adds new predicate offences and widens the definition of money

laundering. It also adds and increases the obligations of reporting and identification.

Another important feature is the introduction of the “gatekeeper initiative” upon lawyers

and other independent legal service providers.

The second directive has two limbs:

5.2.1- Identification:

This provision is also known as “know your client” and means that the service

provider must be satisfied that he is dealing with actual client and not merely a front man.

These requirements are triggered43 when the following happens:

 When entering in a business relationship with a client.

 When opening a client account.

 When offering a safe custody facilities.

 When transaction involves more than 15,000 Euros or more whether in a

single sum or separate installments.

The directive requires that this condition should be met in all cases stated above. In

case there is a doubt then the identity of the client by supplementary supporting evidence.

The directive is particularly concerned about the increased risks of money laundering in

43
Article 3, Directive 2001/97/EC.

34
situations of “non face-to-face operations”44 and it is required that additional documentary

evidences or certifications should be used to establish the true identity of the client.

Some important questions have been left unanswered. What constitutes reasonable

practice for establishing identity? What constitutes supporting evidence? What constitutes

the suspicious activity? How should due diligence requirements be met? I feel that these

questions have been left to be resolved by the municipal legislations. In case they are

passed, and in many cases the Member States have come out with legislations there would

be another issue of harmonizing the identity requirements between member states.

5.2.2- Disclosure:

This requirement45 is imposed to inform the authorities “of any fact which might be

an indication of money laundering”. It also binds these subject entities to furnish reports

upon requests which are also known as “suspicious transaction report” and cooperate with

the authorities. The second directive requires from Member States for adopting institutions

and procedures for the subject entities concerned in this directive for having education and

training in how to identify and control incidences of money laundering. The most important

issue has been left unanswered; whether an objective or subjective standard should be

applied before making the decision to file the STR? In my view this could be that a broad

interpretation is possible for the facts indicating money laundering. It also keeps in view the

different diversities available in the legal system of the member countries. In my view care

should be taken when we seek the meaning of might or may, as they are ambiguous words

and lawyers know the force of interpreting any word.

5.3- Exemptions for Lawyers:

44
Article 3.11, Directive 2001/97/EC.
45
Article 6 Directive 2001/91/EC.

35
 The second directive grants46 Member States the latitude to exempt these

professionals including lawyers from certain obligations. The language of the directive

seems to support the concept client loyalty and client confidentiality. The exemption relates

to a situation when they are ascertaining the legal position of their client. Also in situations

when they represent a client in a judicial proceeding in all manners, “whether such

information is received or obtained before, during or after such proceedings”. However the

directive does not relieve the lawyer from due diligence and know your client requirements.

5.4- Independent legal profession:

The directive use the words “independent legal professional”, there is an ambiguity

in the actual meaning of this expression. In my view it is used because of the variations

and diversity in the legal services sector. This includes almost all the lawyers including

members of bar associations but also professionals providing legal services who are not

employed by or who are independent of their clients 47, but they do not include the in house

lawyers. This is an important concept to appreciate in the context of imposing obligations

of reporting and reconciling it with legal privilege and confidentiality. We still have to wait

for further deliberations from the European Court of Justice (ECJ) on the meaning of this

expression.

46
Article 6 Directive 2001/91/EC.
47
It however does not include lawyers who work as in house lawyer. For this see FATF Consultation paper
Para 280 page 98, “This term is intended to cover lawyers and legal professionals that are licensed or admitted
to practice and who work in law firms or are self employed; it does not cover lawyers who have the status of
employees in a legal undertaking that is not in the business of providing legal advice to third parties”. See also
the case 155/79,A.M.& S. Europe Limited (Australian Mining and Smelting Europe Ltd.v.Commission,155/79,
Rec. 1982, p.1575), in which judgment was given on 18 May 1982. The court held "there are to be found in
the national laws of the Member States common criteria, inasmuch as those laws protect, in similar
circumstances, the confidentiality of written communications between lawyer and client provided that, on the
one hand such communications are made for the purposes and in the interest of the client's rights of defence
and, on the other hand, they emanate from independent lawyers, that is to say, lawyers who are not bound to
the client by a relationship of employment".

36
5.5- Reporting authorities:

The directive also gives discretion48 to the Member States to create a mechanism of

cooperation between the Bar Associations or professional bodies and the state authorities

responsible for money laundering compliance. The inherent problem in this measure is that

this is time consuming and it would serve no purpose to include these professional bodies.

However some member countries have created authorities49 for receiving such reports. The

Associations have been mainly employed to give guidelines 50 for the attorneys on how to

interpret the new law.

5.6- Exceptions:

The Recitals of this directive has outlined the exceptions51 to the exemptions in

three instances:

 When a lawyer participates in money laundering.

 When a legal advice is provided for the purpose of laundering money

 When the lawyer knows that the client seeks legal advice for money

laundering.

5.7- Standard of knowledge:

48
Article 6 Directive 2001/91/EC
49
In case of UK the authority is The Serious Organised Crime Agency (SOCA), created by virtue of the
Serious Organised Crime and Police Act 2005, and assumed responsibilities on 1 st April 2006. For The
Netherlands it is The Dutch Office for the Disclosure of Unusual Transactions (MOT), which includes part of
the Ministry of Justice and the Bureau for Police Support of the National Public Prosecutor (BLOM) and
regards the Unusual Transactions Disclosure Act, as part of the National Criminal Intelligence Service
(NCIS).
50
In UK The Law Society issued guidelines based on the case Bowman v Fels [2005] EWCA Civ 22 for
attorneys on how to interpret the new money laundering regime.
51
Action points for EU Bars and Law Societies on the Implementation of the Money Laundering Directive.
http://www.ccbe.org/doc/En/action_points_220102_en.pdf

37
 Given the exceptions and the recital there is a conflict in the standard of knowledge

required. I would discuss this point more to highlight the standard required. The second

directive52 uses the following words:

“Knowledge, intent or purpose required as an element of the above mentioned

activities may be inferred from objective factual circumstances”. (emphasis added)

The directive uses a broad definition of money laundering and then pins a standard of

imputed knowledge for the lawyer to know that money laundering has been done or not. In

my view given the definition of the money laundering, a lawyer can be considered to have

been involved in money laundering, if she should have known or ought to have known that

property at hand is being used for money laundering. At the same time there are exemptions

available which makes this standard ambiguous. The vital missing link would be how to

identify what range of activities would constitute money laundering and with imputed

knowledge standard all the activities could be interpreted to be activities of money

laundering.

5.8- Capacity building:

The directive53 is quite explicit in asking from the member states to create

mechanisms and institutions which can provide guidelines and special training progrmmes

for the professionals. It also envisages up to date information on the practices of money

laundering.

5.9- Prosecution of lawyers for money laundering offences:

The directive is silent on the methods of prosecution of the lawyers. It has been

generally left for the member states to draft rules for such prosecutions after consultations
52
Article 1.4 C Directive 2001/97/EC.
53
Article 11, 2001/97/EC.

38
with the respective bar associations. In general the lawyers are subject to criminal liability

in case they participate in money laundering schemes. The data for such prosecutions is

scanty54. Suffice to say that after the second directive would be fully implemented there

would be some activity on this front, but it is established that such a conduct now entails

criminal liability.

5.10- The Third Directive:

The EU has issued another directive 55 (here after referred as third directive). The

third directive has reproduced almost the second directive but has incorporated more

detailed scope of regulated sector. It chiefly covers the terrorist financing and has

introduced new definitions such as for Politically Exposed Persons, Beneficial Owners and

Business Relationship. In terms of legal professional privilege it remains the same as

second directive except for removal of some constraints on “tipping off”. This is in line

with the FATF requirements. The third directive provides that when a legal advisor seeks to

dissuade his client from wrong full behaviour this would not be construed as tipping off.

Both the directives preserve privileges as the key to attorney client relationship.

54
In case of UK 11 people including three solicitors and a legal assistance was arrested on suspicion of money
laundering in June 2003. Some have been found guilty of the charges and have been awarded different
sentences. They have been charged against Proceeds of Crime Act 2002 (POCA).
55
Directive 2005/60/EC on the use of the financial system for the purpose of money laundering and terrorist
financing.

39
 6. DUTIES OF LAWYERS AND GATEKEEPER
(INITIATIVE) LIABILITY:
I would now discuss some issues which should be addressed to implement the

gatekeeper’s liability on attorneys thus we need some requirements 56 for further analysis.

They are:

 The Due Diligence Obligation.

 Independence of the Lawyer.

6.1- The Due Diligence Obligation:

Diligence is described in Black’s Law Dictionary (7th Edition) as:

“a continual effort to accomplish something. Care; caution; the attention and care

required from a person in a given situation. The Roman-Law equivalent is

diligentia. Care, or the absence of negligentia, is diligentia. The use of the word

diligence in modern English, though it is still retained as an archaism of legal

diction. In ordinary usage, diligence is opposed to idleness, not to carelessness. John

Salmond, Jurisprudence 393 n. (i) (Glanville L. Williams ed., 10th ed. 1947)”.

56
John C. Coffee, Jr. The Attorney as Gatekeeper: An Agenda for the SEC. Columbia Law Review, Vol. 103,
No. 5. (June, 2003), pp 1293-1316. I have adopted two of his proposals for further analysis cited on pp 1310.

40
Then due diligence is further defined in Black’s Law Dictionary (7th Edition) as:

“the diligence reasonably expected from, and ordinarily exercised by, a person who

seeks to satisfy a legal requirement or to discharge an obligation”.

According to this definition due diligence depends on a standard of care which in tort law,

is the degree of prudence and caution required of an individual who is under a duty of care.

A breach of the standard is necessary for a successful action in negligence. The standard of

care is dependent on a reasonable man test as confirmed in Blyth v Birmingham

Waterworks Co57.

Who is then a reasonable man is an important question and the courts have

addressed it in many judgment. For ordinary sense a reasonable man is “the man on the

Clapham omnibus” as Greer LJ explains in Hall v. Brooklands Auto-Racing Club58. He is

also defined by Lord Steyn as the “commuter on London Underground” in McFarlane v

Tayside Health Board59. This test is an objective test based on the faculties of an average

man who is not perfect but is also flawed.

The general test regarding standard of care would not work in every case examining

a tort of negligence. Actions or omissions of skilled professionals might lead to a tort of

negligence ad we need a different approach and test. Due to their special education and

certification a higher and different standard of care is required. This means, i.e. if a car

mechanic repairs a car, the standard of care required would not be that of a reasonable

person, but that of a reasonable car mechanic. For this reason the courts have treated the

professionals in their own domain see Bolam v Friern Hospital Management Committee 60

57
[1856] 11 Ex 781.
58
[1933] 1 KB 205.
59
[1999] 4 All ER 961.
60
[1957] 1 WLR 582.

41
for a medical negligence cases also known as “Bolam Test”. In similar fashion we have

White v Jones61 for attorneys.

The due diligence requirement is very important to appreciate in the context of any

standard of care and duty imposed on the attorneys. This test has at to at least fulfill the

minimum requirements of reasonable assessment made by the person and in this case the

attorney, about the veracity of the facts placed before him. In other words the lawyer should

take into consideration some important factors into consideration like the true identification

as “know your customer” and also make sure that the clients purpose is really what he

states. I agree with Coffee (2003) to impose the due diligence on the lawyers. He has not

mentioned as to what should be the test for assessing the due diligence. My point is that in

case the attorney doesn’t t meet the due care we have to compare him against some

standard and that would ultimately be the yardstick for imposing any liability on him. The

second directive has not given us any standard of care to implement the due diligence

requirement. It is left largely to the interpretation by the Member States, and there could be

confusions as to what is the common standard of care in EU given the variety of legal

orders in the EU.

6.2- Independence of the Attorney:

This point is closely linked with the reporting requirement. The attorney is at a

crossroad to act what if he suspects some wrongdoing. One argument would be to report

and one would advise him to not do that for the sake of client privilege. However in any

way we look at this issue is very volatile and has led to a lot of debate ever since the

gatekeeper initiative and the second directive on money laundering 62. The independence of
61
[1995] 2 WLR 187.
62
Directive 2001/97/EC on prevention of the use of financial system for the purpose of money laundering.
This directive would be discussed in detail with special reference to obligations imposed on the lawyers. This
directive has been criticized by Bars across EU with views of labeling it “too intrusive” and hampering legal

42
the attorney cannot be ignored in the interest of justice and public policy. I propose to say

that issue is dependent on the very functioning of the attorney. The attorney is very much

dependent on the information given to him by the client and can only act if the client is

forthcoming. In case the regime is too strict it would hamper the client’s relationship with

the lawyer and the vital information would not be forthcoming. I believe that there should

be a measure of discretion available to the attorney who can decide which information is

important and needs to be disclosed. The directive has addressed this issue and has given an

exception list discussed in the chapter 5. It would be interesting to note what does ECJ has

to comment on this.

Some critics believe that in this respect the Bar Association does have an important

role to play in adopting guidelines and code of conduct for the attorneys in such a case. I

propose that this has not made any effect on the incidence of curbing the menace of money

laundering and corporate scandals. There are authors like Coffee (2003) who wants to add

restrictions on the attorneys and make him a pliable gatekeeper. I would not agree with

Coffee (2003) in making the attorney as a pliable gatekeeper for the regulatory authority in

the shape of an informer. If the prevention of illegality is sought then curbing on the

independence of the lawyer can be justified on public policy grounds not on legal grounds,

this should have been discussed by Coffee in more detail. The next issue is to determine

who has been the victim of this crime, is it the regulatory authority or system. Coffee has

assumed that the ordinary layman has been the chief victim in this crime. His analysis of

independence largely hinges on the corporate scandals where he has noted that lawyers

have failed to report illegality especially in the Enron Scandal where issue of money

professional independence.

43
laundering was involved. I would like to add that this does not suffice to leave the attorneys

at the mercy of the regulatory authority63 entirely.

In my view it is the inherent lack of competence of the regulatory authority to detect

illegalities and money laundering in the system. The regulatory authorities are unable to

complete the job on their own so they need some outside assistance and that is available

from the professionals. The attorneys do meet the criterion of gatekeepers and the liability

can be imposed on them it would still be the job of the regulatory authority to assist the

lawyers and for that matter any gatekeeper in performing his duties as diligently as

possible. The second directive has addressed this issue and correctly imposed obligations

on Member States to create such a framework.

6.3- FATF and Gatekeeper Initiative:

Few words should be said about the FATF and gatekeeper initiative. The FATF has

been engaged in setting international bench marks for adopting and building Anti Money

Laundering Regime. In this context FATF has issued its 40 Recommendations and has

constantly updated it over the years. It has updated it 40 Recommendations 64 and has also

included the gatekeeper initiative. It has provided for a gatekeeping role for lawyers when

they are engaged in certain transactions. It has given the due importance to legal privilege

and confidentiality. The implication of this act is to leave the matter to the independent Bar

Associations to draw up guidelines for the lawyers.

Recommendation 12 requests that countries apply due diligence and record keeping

requirements to lawyers when they prepare for cases of transactions in the areas of:

 buying and selling real estate;

63
Unlike EU the US has no such obligation placed on the lawyers to report specifically in the cases of money
laundering in USA PATRIOT Act (2001).
64
See the website http://www.fatf.org. The latest version was updated on February 2007.

44
  managing client money, securities or other assets;

 managing bank savings or securities accounts;

 organizing contributions for the creation, operation or management of companies;

and

 creating, operating or managing legal persons or arrangements and buying and

selling business entities.

Recommendation 14 further provides that if a lawyer counsels a client to dissuade the

client from unlawful activity does mean “tipping off” 65. Recommendation 16 further

provides that lawyers in these specified areas should be subjected to suspicious transaction

report requirements when they engage in financial transactions. The recommendation

further provides that a lawyer would not be subjected to suspicious transaction report (STR)

where the information was obtained in circumstances of legal privilege and confidentiality.

It further suggests that each municipal jurisdiction has the right to set standards for

professional secrecy and privilege. It also adds that a municipal jurisdiction should institute

a system whereby these STRs should be submitted to a Bar Association or any other legal

self regulatory organization.

There has been a cautious approach by all international standards in determining the

content of imposing liability on attorneys, due to the reasons discussed above. In my

opinion this is the correct approach as the goal is to curb money laundering but not at the

cost of professional independence and basic rights of clients.

6.4 Gatekeeper initiative and US:

65
This is otherwise prohibited when a party files a suspicious repot, and generally is looked upon by the legal
community.

45
 The US has been reluctant to apply the new gatekeeper initiative in their system till

date, explicitly. However the attorneys are subjected to some sort of reporting obligations in

Sarbanes Oxley Act 2002 which mainly concerns corporate governance 66. The USA

PATRIOT Act is also silent on imposing any obligations on the lawyers. The US authorities

are relying on the American Bar Association (ABA) for developing some rules of conduct

for the attorney.

7. CONCLUSION:
There is no doubt that attorneys are also gatekeepers and they have the capacity to

detect illegality at the exante level. However the controversy surrounds on the duties of

lawyers as they are bound by the client privilege and confidentiality. Which ever way we

look at this issue any regulation which is imposed on the attorneys has to be in line with

these requirements. In my view the second directive is a satisfactory effort in preserving

these rights. There is a criticism on the directives that reporting duties imposed may

infringe privilege and secrecy. The directives do protect this right and has given exceptions

also where the reporting duties may not be imposed. There is a lot of flexibility in the

language of the directives and lot of leverage is given to the Member Countries to figure

out how to implement the directive. The directives have preserved these privileges as the

cornerstone of the attorney client relationship. It will be interesting to see how the

European Court of Justice would react to these new provisions.

On the cost side these measures would also increase the cost of gatekeepers which

would be ultimately borne by the clients, but the services which are provided by these

professionals are essential and cost factor would not matter that much As for the concerns
66
On November 21,2002, the SEC proposed rules under section 307 of the Sarbanes-Oxley Act to mandate
"up the-ladder" reporting. This rule is however only valid for corporate governance. I have found n evidence
that it could be also be used for money laundering as such.

46
about the costs it is another topic. The cost argument is not the only concern for the lawyers

but for other professionals. There is no doubt that costs would rise but they can be borne by

the clients ultimately.

A thought must be given to the weakness of the existing regulatory framework. Ever

since the bankers are subjected to STRs some 2million reports were filed in the US in 2006

alone, however do the authorities possess enough competence to sift these STRs and figure

out the incidences of money laundering is another matter. It is still too early to comment on

the effectiveness of the new measures. While the laws on money laundering theoretically

help in combating this menace but we cannot have a cost benefit analysis due to

ambiguities in estimates of volume of money being laundered. In a new book by Peter

Reuter & Edwin M. Truman (2004), the authors67 note that the STRs have risen but there

has no considerable increase in seizures and confiscations. They note that estimates are

based on ambiguous data so there can be no cost benefit analysis from the enforcement

perspective. The same is true for attorneys as no research has been carried out to really

understand how much volume of money is being laundered 68 and what is the cost benefit

analysis? In my opinion this is my worry for the effectiveness of the new measures.

On the other hand these measures cannot be created in isolation, there has to be an

international will to implement these measures across the board, so international

cooperation is an essential element in this debate.

There is some skepticism on the new measures but the thesis has concluded that

lawyers are gatekeepers and they can be effective gatekeeper. The measures adopted by EU

are laudable and they have circumvented the concerns of turning the lawyers into

67
Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight against Money Laundering (2004).
68
Commission Staff working Document, The application to the legal profession of Directive 91/308/EEC on
the prevention of the use of the financial system for the purpose of money laundering. pp 30 notes 61, 62.

47
“informers”. In my view the new measures should be given some more time to fully

appreciate their efficacy.

8. BIBLIOGRAPHY:

Literature:

Alberto Chong and Florencio Lopez-de-Silanes, Money Laundering and its Regulation,
Preliminary Draft September 27, 2005.

André Standing & Hennie van Vuuren, The Role of Auditors: Research into
Organised Crime and Money Laundering, Institute For Strategic Studies, Paper 73, May
2003.

Brent L. Bartlett, The Negative Effects of Money laundering on Economic Development,

Economic Research Report for The Asian Development Bank, Regional Technical
Assistance Project No. 5967, Countering Money Laundering in The Asian and Pacific
Region, May 2002.

Daniel J. Mitchell, Fighting Terror and Defending Freedom: The Role of Cost Benefit
Analysis, Pace Law Review Vol. 25:219, 2005. pp 219-233.

David A. Chalkin, Money laundering: An Investigatory Perspective, Criminal Law Forum

Vol. 2 No.3, spring 1991, pp. 467-510.

Donato Masciandaro, Economics of Money Laundering: A Primer,

http://ssm.com/abstract=970184.

Donato Masciandaro, Combating Black Money: Money Laundering and Terrorism Finance,
International Cooperation and the G8 Role, Paper prepared for the Conference “Security,
Prosperity and Freedom: Why America needs the G8”, Bloomington, June 3-4, 2004. New
Draft: June, 17, 2004. pp 1-29.

48
Edward J. Krauland & Aaron R. Hutman, Money Laundering Enforcement And Policy.
http://www.abanet.org/intlaw/committees/special_projects/money_laundering/monlaunder2
003yir.doc

Edwin M. Truman, Anti-Money Laundering as a Global Public Good, Senior Fellow

Institute for International Economics, October 2004.

Elod Takats, A Theory of “Crying Wolf”: The Economics of Money Laundering

Enforcement, International Monetary Fund Working Paper, Western Hemisphere
Department. April 2007.

Eric Helleiner, The Politics of Global Financial Re regulation: Lessons from the Fight
against Money Laundering Centre For Economic Policy Analysis Working Paper No 15
April 2000.

John C. Coffee, Jr. The Attorney as Gatekeeper: An Agenda for the SEC
Columbia Law Review, Vol. 103, No. 5. (Jun., 2003), pp. 1293-1316.

Kern Alexander, “The International Anti-Money Laundering Regime: The Role of the
Financial Action Task Force,” Journal of Money Laundering Control, Vol.4, No.3 (2001),
p.233.

Lawrence Malkin and Yuval Elizur, Terrorism’s Money Trail, World Policy Journal Spring
2002.

Mamadi Corra; David Willer, The Gatekeeper, Sociological Theory, Vol. 20, No. 2. July
2002, pp. 180-207.
Mark Yeandle, Michael Mainelli, Adrian Berendt, Brian Healy, Anti Money Laundering
Requirements: Costs, Benefit, and Perceptions, City Research Series Number Six. June
2005. http://www.cityoflondon.gov.uk/economicresearch.

Mathias J. Borgers, International Cooperation in Confiscation Matters and Dutch

Legislation: Points of Attention for Effective Cooperation in The EU. Working paper
presented at the seminar of the European Judicial Training Network, International
cooperation in criminal matters: freezing of assets and evidence and confiscation in cross
border criminal cases, 21-23 September 2005.

Michael Levi, Money Laundering and Its Regulation, Annals of the American Academy of
Political and Social Sciences, Vol. 582, Cross-National Drug Policy. July 2002, pp. 181-
194.

Michael Levi, Controlling the International Money Trail: What Lessons Have Been
Learned? Paper presented at: Global Enforcement Regimes Transnational Organized
Crime, International Terrorism and Money Laundering Transnational Institute (TNI)
http://www.tni.org/crime. Amsterdam, 28-29 April 2005.

49
Michael Levi and Peter Reuter, Money Laundering, Crime and Justice Vol. 34 2006. pp
289-375.

Michael Levi, Money Laundering: Risks and Countermeasures.

http://www.aic.gov.au/publications/rpp/02/rpp02-01.pdf.

Moises Naim, The Five Wars of Globalization, Foreign Policy No 134, Jan – Feb, 2003, pp.
28-37.

Nikos Passas, The Genesis of the BCCI Scandal, Journal of Law and Society, Vol. 23, No.
1, The Corruption of Politics and the Politics of Corruption. March, 1996. pp. 57-72.

Peter Reuter and Edwin Truman, Chasing Dirty Money: The Fight Against Money
Laundering, November 2004.

Ranier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy,

Journal of Law, Economics, & Organisation, Vol. 2, No. 1, Spring, 1986. pp. 53-104.

Raymond W. Baker, The Biggest Loophole in the Free-Market System, The Washington
Quarterly, Vol. 22:4, Autumn 1999, pp. 29-46.

Sam Vaknin, Crime and Corruption, 1st Edition, 2002.

Zagaris, Bruce, The Gatekeepers Initiative: An Emerging Challenge for International

Financial Advisers.
http://www.abanet.org/crimjust/taskforce/articles/gatekeeper1.pdf

Cases:

Bowman v. Fels [2005] EWCA Civ 226.

Three Rivers District Council and Others v. Bank of England [2004] EWCA Civ 218.

Blyth v. Birmingham Waterworks Co. [1856] 11 Ex 781.

Hall v. Brooklands Auto-Racing Club [1933] 1 KB 205

McFarlane v. Tayside Health Board [1999] 4 All ER 961.

Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582.

White v. Jones [1995] 2 WLR 187.

A.M.& S. Europe Limited (Australian Mining and Smelting Europe Ltd.v.Commission

155/79, Rec. 1982, p.1575.

50
Conventions and Reports:

United Nations:

Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, U.N.
Doc. E/Conf.82/15 (1988). UN office for Drug Control and Crime Prevention (UN-
ODCCP) Vienna, Austria, 1991.

G8 Countries:

Transnational Organized Crime”, held October 19-20, 1999 Moscow and gave the idea
what is known as “gatekeeper initiative” Communiqué available at
http://www.library.utoronto.ca/g7/adhoc/crime99.htm.

Financial Action Task Force:

Financial Action Task Force on Money Laundering, Report (1990).

The first “Forty Recommendations” were adopted in 1990 and they were revised in 1996.
In May 2002 FATF issued another revised version which was debated upon by the member
countries and was officially adopted in June 2003, Berlin. The 1996 and 2003 can be
compared at http://www.fatf-gafi.org/40Recs_en.htm and http://www.fatf-gafi.org/40Recs-
1996_en.htm

FATF Report on Money Laundering Typologies 1995-1996

Report of FATF report on non compliant countries 2002.

EU

COMMISSION STAFF WORKING DOCUMENT

The application to the legal profession of Directive 91/308/EEC on the prevention of the
use of the financial system for the purpose of money laundering. Brussels, 19.12.2006
SEC (2006) 1793.

EU Bars and Law Societies:

Action points for EU Bars and Law Societies on the Implementation of the Money
Laundering Directive. http://www.ccbe.org/doc/En/action_points_220102_en.

United Kingdom Law Society:

Guidelines for Solicitors for meeting requirements of Proceeds of Criminal Money Act
2003, based on Bowman v. Fels [2005] EWCA Civ 226. The Law Society 2005.

51
Laws:

European Union:

Directive 91/308/EEC on the prevention of the use of the financial system for the purpose
of money laundering.

Directive 2001/97/EC amending Council’s Directive 91/308/EEC on the prevention of the

use of the financial system for the purpose of money laundering.

Directive 2005/60/EC on prevention of the use of the financial system for the purpose of
money laundering.

United Kingdom:

Proceeds of Criminal Money Act (POCA) 2003.

United States of America:

Bank Secrecy Act (BSA) of 1970

Money Laundering Control Act of 1986.

United and Strengthening America by Providing Appropriate Tools Required to Intercept

and Obstruct Terrorism Act USA PATRIOT (2001).

Sarbanes-Oxley Act (2002).

52