Applying Anti-Money Laundering Reporting Obligations on Lawyers: The UK Experience

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Anticorruption advocates and reformers have rightly been paying increased attention to the role of “gatekeepers”—bankers, attorneys, and other corporate service providers—in enabling kleptocrats or other bad actors to hide their assets and launder their wealth through the use of anonymous companies. An encouraging development on this front are the bills currently pending in the U.S. Congress that would require corporate formation agents to verify and file the identity of a registered company’s real (or “beneficial”) owners, and also would extend certain anti-money laundering (AML) rules, particularly those requiring the filing of suspicious activity reports (SARs) with the US Treasury, to these corporate formation agents.

Not everyone is thrilled. The organization legal profession, for example, is crying foul. American Bar Association (ABA) President Hilarie Bass wrote to Congress that the proposed expansion of SAR obligations to corporate formation agents, many of whom are attorneys or law firms, would compromise traditional duties of lawyer-client confidentiality and loyalty. As Matthew pointed out in a prior post, it’s not clear that this assertion is correct, as the proposed bills contain express exemptions for lawyers. But even putting that aside, it’s worth recognizing that applying SAR obligations to attorneys wouldn’t be unprecedented. Many European countries have had similar requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports (STRs, essentially another term for SARs). As in the US right now, that aspect of the 2001 EC directive was extremely controversial. One EU Commission Staff Working Document went so far as to say it was “the most controversial element of the Directive” because it represented “a radical change to the principle of confidentiality that the legal profession has traditionally observed.” Some EU states and national bar associations launched an ultimately unsuccessful legal challenge to the requirement that attorneys file STRs, on the grounds that it violated the right of professional secrecy guaranteed by the Charter of Fundamental Rights of the European Union.

Yet in the end, the imposition of the STR obligations on lawyers does not seem to have radically altered the legal profession in Europe. Countries appear to have developed safeguards that preserve the essential aspects of attorney-client confidentiality, even while implementing the EC Directive. Consider, for example, how this all played out in the United Kingdom. Continue reading →

Guest Post: Are Public UBO Registers a Good or a Bad Proposition? A Further Reply to Professor Stephenson

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Today’s guest post, from Martin Kenney, the Managing Partner of Martin Kenney & Co., a law firm based in the British Virgin Islands (BVI), continues an ongoing debate/discussion we’ve been hosting here at GAB on the costs and benefits of public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. That debate was prompted by the UK’s decision to mandate that the 14 British Overseas Territories create such public registries, and Mr. Kenney’s sharp criticism of that decision in a post he published on the FCPA Blog. That post prompted reactions from Rick Messick and from me. Our pushback against Mr. Kenney’s criticisms stimulated another round of elaboration on the critique of the UK’s decision, with a new post from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). I subsequently replied, explaining why I did not find Mr. Kenney’s or Mr. Cook’s criticisms fully persuasive. Today’s post from Mr. Kenney continues that exchange:

Public [UBO] registers are rather cheap political playing to the gallery, saying “Aren’t we wonderful to have done this?” – ignoring the fact that what we have established in the UK does not work properly….  It seems to me outrageous that the UK Government, who lack a lot in the area of anti-money laundering, should thus seek to impose on their overseas territories measures – often, where they cannot be afforded economically, that go far beyond what the UK has.

Lord Flight (Conservative), Member of the House of Lords, Speech to the House of 21 May, 2018, Debate on the Sanctions and Anti-Money Laundering Bill [HL] 

The fact that Professor Stephenson welcomes a good discussion and has opened the doors to his blog once again, means it would be impolite of me to not provide a response to his latest observations.

From the outset, I will stress that I will not seek to address every point Professor Stephenson makes. However, having addressed those below, if there are others he wishes me to respond to, I will endeavor to do so. Continue reading →

Putting Corruption on the Human Rights Agenda

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The Office of the United Nations High Commissioner for Human Rights along with the UNODC will hold an expert workshop this Monday, June 11, on what the human rights bodies within the United Nations system can do to advance the fight against corruption.  A cross-section of human rights and anticorruption experts will discuss ways to link anticorruption measures with efforts to promote and protect human rights, examine methods for assessing the impact corruption has on the enjoyment of human rights, and consider what more the UN-system, particularily the Human Rights Council, can do to assist member states adopt a rights-based approach to combatting corruption.  More information on the session here.

The workshop will be followed by a meeting jointly organized by Center for Civil and Political Rights, the Geneva Academy of International Humanitarian Law and Human Rights, and the Office of the High Commissioner for Human Rights to develop new advocacy tools for the UN human rights mechanisms, in particular the bodies that oversee compliance with the various human rights treaties, to address the issue of corruption.  More information on this meeting here.

This writer is one of several activists concerned with both human rights and corruption who identfied eight actions that should be immediately taken to align efforts to promote human rights with those aimed at fighting corruption.  The eight are listed in the following letter that will be provided to all those attending the two meetings. Continue reading →

Tracking Corruption and Conflicts of Interest in the Trump Administration–June 2018 Update

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Since May 2017, GAB has been tracking credible allegations that President Trump, as well as his family members and close associates, are seeking to use the presidency to advance their personal financial interests, and providing monthly updates on media reports of such issues. Our June 2018 update is now available here. The most troubling new items included in this update are the following:

  • First, there is evidence suggesting that the Chinese government may have provided financial benefits to Trump-affiliated businesses in order to influence the President to take steps to lift sanctions on ZTE, a Chinese telecommunications company that has been sanctioned by the U.S. government for illegally transferring U.S. high-technology components to Iran and North Korea. In particular, shortly before President Trump announced that his administration would seek to lift the sanctions on ZTE, a Chinese state-owned company had provided a $500 million loan for a Trump Organization development project in Indonesia, and around the same time the Chinese government had granted several trademarks to Ivanka Trump’s company.
  • Second, investigations of Trump’s personal attorney Michael Cohen have revealed that Cohen’s consulting company, which he formed shortly before the election, had received substantial payments from several clients, including a firm closely tied to a Russian Oligarch, as well as several large firms with strong interests in pending U.S. government decisions (including AT&T and Novartis). It is not clear what, if any, consulting services Mr. Cohen’s firm provided, nor is it clear what happened to the money that the firm received from these corporate clients, raising the possibility that the firm may have been a “slush fund” for Trump, or, worse, as a means for funneling bribes to Trump or his close associates in exchange for favorable policy decisions. At this point, this is all speculation, though more information may become available as the investigations into Cohen’s activities proceeds.

As always, we note that while we try to include only those allegations that appear credible, we acknowledge that many of the allegations that we discuss are speculative and/or contested. We also do not attempt a full analysis of the laws and regulations that may or may not have been broken if the allegations are true. For an overview of some of the relevant federal laws and regulations that might apply to some of the alleged problematic conduct, see here.

Why the Recent Recommendations for Reforming College Basketball are a Step in the Right Direction

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Last October, the United States was rocked by an FBI and DOJ probe into corruption in college basketball. The resulting report detailed a number of ongoing schemes, including bribes paid to players by shoe and apparel companies and bribes paid to coaches to steer players to certain financial advisers. As a response to the government investigation, the National Collegiate Athletic Association (NCAA) established an Independent Commission on College Basketball, chaired by former U.S. Secretary of State Condoleezza Rice, to make recommendations on “legislation, policies, actions and structure(s) to protect the integrity of college sports.” After six months of research, the committee produced a 53 page report which concluded that “[t]he levels of corruption and deception [in men’s college basketball] are now at a point that they threaten the very survival of the college game as we know it,” and outlined a number of recommendations for changing the college basketball system. It is now up to the NCAA to decide whether it will implement the recommendations.

The proposed reforms by the Commission have been met with great skepticism. Critics argue that the report only tinkers at the margins and fails to get to the root causes of the corruption and other problems in college basketball. (For a sampling of the critical responses, see here and here and here). These criticisms go too far. Fixing the complex problems that permeate college basketball will take some time. The reforms outlined in the report, though imperfect, are a step in the right direction, and the NCAA should embrace and adopt them. Among the many proposals advanced by the Commission, the following reforms, if implemented by the NCAA, will have an immediate impact on decreasing corruption in collegiate athletics:

Continue reading →

Congress Should Act to Make US Aid to Ukraine Contingent on Anticorruption Reform

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Since the Maidan Revolution removed former President Yanukovych from power in 2014, anticorruption progress in Ukraine has been uneven at best. Ukraine passed important anticorruption legislation in 2015, yet implementing it has been a challenge. Progress in some areas, including the judiciary and prosecutors’ offices, have met with significant and growing resistance. Many reformers within the government have resigned. For what it’s worth, Ukraine’s Corruption Perceptions Index score has only marginally improved. Still, there has been some progress. A significant portion of Ukraine’s budget is comprised of foreign aid, and donors—who have little patience for having their money stolen or wasted—have pressed the Ukrainian government to take the fight against corruption more seriously. The biggest anticorruption reforms have therefore been the ones on which large donors made their aid contingent.

The United States is one of the most important of these donors. The U.S. sends billions in loan guarantees, military aid, development aid, and State Department spending to Ukraine. During the Obama administration, anticorruption, and political reform more generally, was a high priority for the U.S. in its relationship with the post-Maidan Ukrainian government. Former Vice President Biden emphasized anticorruption during his five visits to Ukraine, and put personal pressure on President Poroshenko to follow through on his commitments in that area. Biden also played a role in delaying one billion dollars in loan guarantees to Ukraine due to corruption concerns—an approach the IMF has also embraced. But the anticorruption strings that the U.S. had attached to foreign aid in the past were imposed as a matter of executive discretion rather than legislative obligation.

Under the Trump administration, perhaps unsurprisingly, ensuring that Ukraine follows through on its anticorruption reforms has not been a foreign policy priority. No highly visible person in the current administration has taken on Biden’s conspicuous role in ensuring Kyiv follows through on its Minsk commitments. If President Trump isn’t willing to use U.S. leverage to continue to push for anticorruption efforts in Ukraine, the U.S. Congress can and should step in by putting anticorruption conditions on at least some American spending in Ukraine.  Continue reading →

July 9 –13 Course on Combatting Corruption in Local Government

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The International AntiCorruption Academy, an international organization and post-secondary educational institution based in the Vienna suburbs, is offering a week-IACA buildinglong course on combatting corruption in local government this July 9 – 13. The course will examine the various types of corruption commonly found in municipal and regional governments, what can be done to prevent their occurrence, and measures for strengthening the integrity of public employees.  Instructors are Professor Robert Klitgaard of the Claremont Graduate University, Jeroen Maesschalck of the Leuven Institute of Criminology, and this writer.

The deadline for enrolling is fast approaching.  More information on the course and  scholarships available here.

The Debate Over Public UBO Registries Continues: A Response to Kenney and Cook

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As our regular readers know, over the past few weeks GAB has had the opportunity to host on what is shaping up to be a lively and interesting debate over the advantages and disadvantages of creating public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. A UBO, for those not familiar with the lingo, is the real-live flesh-and-blood human being who has a sufficiently strong direct or indirect ownership interest in a company to be considered the “true” owner. Increasing UBO transparency is a top priority for many civil society activists, who argue that anonymous company ownership facilitates grand corruption, as well as money laundering, tax evasion, and other harmful activities. In many jurisdictions, UBO information is not available, and even law enforcement may have difficulty determining a company’s true owners. In other jurisdictions, companies must submit and update validated UBO information to the authorities, but that information is confidential, available only to law enforcement or other regulatory agencies in the context of an investigation, or perhaps to others in a limited set of circumstances (for example, banks performing customer due diligence). Most anticorruption advocates, as well as law enforcement agencies and most experts, agree that a confidential UBO registry is far superior to having no registry at all. The harder question, and the one we’ve been debating here at GAB, concerns whether the UBO registry should be public, so that anyone—not just law enforcement agencies acting pursuant to an investigation—can examine the registry to see who owns what.

The most recent round of discussion and debate was triggered when the UK—one of the few major economies that has implemented a public UBO registry—decided to require the 14 British Overseas Territories, such as the British Virgin Islands (BVI)—to create and maintain public UBO registries. Many in the civil society community celebrated this as a huge triumph, but others denounced the UK’s decision. The denunciation that got the debate going over here at GAB was a provocative piece by Martin Kenney, a BVI asset recovery lawyer, on the FCPA Blog. Mr. Kenney’s piece prompted replies from GAB Senior Contributor Rick Messick (here) and from me (here). Then last week, we were able to publish two more pieces, one from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). Both Mr. Kenney and Mr. Cook took issue with some or all of the arguments that Rick and I advanced, and pressed the claim that the UK’s imposition of public UBO registries on the Overseas Territories was a bad mistake.

Both of their pieces raise important points that deserve a reply. For that reason, and because I think that this issue is important enough that continuing this exchange on GAB for another round or two may be worthwhile for our readership, in this post I’m going to offer a response to Mr. Kenney’s and Mr. Cook’s posts. To lead with the conclusion: While I respect their experience and expertise in these matters, I found most of their arguments unconvincing, or at the very least in need of further explanation before I’m ready to reconsider my (admittedly tentative) view that public UBO registries have sufficient advantages over confidential UBO registries that moving from the latter to the former is desirable. Continue reading →

Mixed Messages from the UK’s First Contested Prosecution for Failure to Prevent Bribery

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In February 2018, the UK secured its first ever contested conviction of a company for “failure to prevent bribery.” Under Section 7 of the UK Bribery Act (UKBA), a company or commercial organization faces liability for failing to prevent bribery if a person “associated with” the entity bribes another person while intending to obtain or retain business or “an advantage in the conduct of business” for that entity. Following an internal investigation, Skansen Interior Limited (SIL)—a 30-person furniture refurbishment contractor operating in southern England—discovered that an employee at its firm had agreed to pay nearly £40,000 in bribes to help the company win contracts worth £6 million. Company management fired two complicit employees and self-reported the matter to the National Crime Agency and the City of London police. The Crown Prosecution Service ultimately charged SIL with failing to prevent bribery under Section 7. Protesting its innocence, SIL argued that the company had “adequate procedures” in place at the time of the conduct to prevent bribery; SIL, in other words, sought to avail itself of the widely-discussed “compliance defense” in Section 7(2) of the UKBA, which allows a company to avoid liability for failing to prevent bribery if the company can show that it “had in place adequate procedures designed to prevent persons associated with [the company] from undertaking” the conduct in question.

The case proceeded to a jury trial. The verdict? Guilty. The sentence? None. In fact, SIL had been out of business since 2014, so the judge had no choice but to hand down an absolute discharge—wiping away the conviction.

The hollow nature of the government’s victory has led some commentators to call the prosecution “arguably unprincipled” or even a “mockery of the UK criminal process.” Indeed, the bribing employee and the bribed individual had already separately pleaded guilty to individual charges under UKBA Sections 1 and 2, respectively, and the remaining shell of a corporation had no assets or operations. Other commentators pointed out that precisely because the company was dormant it would have been unable to enter into a deferred prosecution agreement (DPA), lacking assets to pay financial penalties or compliance programs to improve. Putting aside arguments about the wisdom or fairness of pursuing a prosecution in these circumstances, the SIL case sheds light on Section 7(2)’s “adequate procedures” defense. While the UK government has secured a few DPAs for conduct under Section 7—beginning with Standard Bank Plc in 2015—SIL is the first case in which the Section 7(2) “adequate procedures” defense was tested in front of a jury.

While the government argued that it prosecuted the case primarily to send a message about the importance of anti-bribery compliance programs, the UK government’s actions in the SIL case ultimately sends mixed messages to companies and may have counterproductive effects. Continue reading →

Malaysia’s Anti-Fake News Bill Breaks Dangerous New Ground

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Since at least 2016, complaints about “fake news” have become increasingly common all over the world. But “fake news” refers to two separate phenomena. In some cases, “fake news” means stories that are actually untrue (not just distorted, but fabricated, and deliberately disguised to make it appear that they come from a legitimate media outlet rather than a propagandist or troll). Shanil posted about the dangers that this sort of fake news poses to anticorruption efforts last December. But politicians, notably President Trump, have appropriated the “fake news” label and applied it to any coverage that they deem unfavorable or unfair, even when the news comes from a legitimate media outlet and there is no credible argument that the story is a deliberate fabrication.

The conflation of these two kinds of “fake news” is dangerous, not least because concerns about the former may provide politicians with a pretext for suppressing the latter. Case in point: in April, Malaysia enacted a new law—the Anti-Fake News Bill—that purports to criminalize fake news. The purpose of the new law, which gives the government has the power to prosecute those who create or spread “fake news” with jail terms of up to six years and fines up to about $123,000, seems to be giving the government more authority and discretion to stamp out unflattering news. Other Southeast Asian countries such as Singapore and the Philippines are considering similar measures.

While the anticorruption community should fight against corrupt actors using fake news to spread false stories, it should also resist efforts of governments to misuse the “fake news” label as a pretext for more extensive regulation of legitimate media and free speech. Censorship laws like Malaysia’s reduce transparency and scrutiny, and ultimately hurt anticorruption efforts by entrenching corrupt, illiberal governments.

Continue reading →