Is the UK effective in detecting and preventing the use of financial crime? Two recent cases suggest it is not.

Background

1. Spotlight on Corruption [https://www.spotlightcorruption.org/] (SOC) spotlights the UK’s role in corruption at home and abroad.
2. SOC wants to see a society with strong, transparent, and accountable institutions that ensure corruption is not tolerated and democracy flourishes both in the UK and globally.
3. On 5 September 2024, Dr Helen Taylor posted an enlightening article:-

1. Falling at the first hurdle: what two recent cases against law firms handling suspect money show about the UK’s anti-money laundering enforcement regime.

1. 1. 1. https://www.spotlightcorruption.org/falling-at-the-first-hurdle-what-two-recent-cases-against-law-firms-handling-suspect-money-show-about-the-uks-anti-money-laundering-enforcement-regime/

4. The above article is educational, and I have summarised the key facts and highlights below.

The summarised SOC article follows:-

Is the UK effective in preventing financial crime? Two recent cases against law firms suggest that it is not.

Two recent rulings against the SRA in the Solicitors Disciplinary Tribunal expose fundamental gaps in legal sector accountability.

1. The SRA lost its contested AML prosecution of Dentons UK and Middle East LLP (Dentons);- the SRA is appealing the ruling in one case, 
2. In the second case, the SRA lost its appeal against the Tribunal’s finding that a sole practitioner, George Fahim Sa’id, did not commit professional misconduct.

Both cases

• involved law firms' failures to properly check foreign political elites from highly corrupt countries looking to buy luxury properties in London.
• were severe enough for the SRA to refer the cases to the Solicitors Disciplinary Tribunal to rule whether a breach had occurred.[https://solicitorstribunal.org.uk/]

In both cases, the Tribunal

• Ruled that there was no case to answer despite the SRA successfully pointing out specific shortcomings in the firms’ due diligence.
• Found that because their AML systems were found to be generally strong, AML failings could be brushed off as insufficiently serious to constitute professional misconduct. 

Comment

• This complete lack of accountability for failing to do proper checks when handling suspect funds raises deeply troubling questions about whether UK law firms can and will face any meaningful enforcement for allowing dirty money into the UK’s financial system.

The following long read examines critical facts and lessons from these two cases.

The world’s largest global law firm buys UK property for top bankers from the kleptocratic regime.

1. In the first case, the SRA lost its contested AML prosecution of Dentons UK and Middle East LLP (Dentons), the London-headquartered branch of the world’s largest global law firm.
   1. https://www.legalfutures.co.uk/latest-news/dentons-breach-of-aml-rules-was-inadvertent
2. The Tribunal cleared Dentons of professional misconduct despite failing to do adequate AML checks when acting in high-risk property deals for ‘Client A’. 
   1. https://solicitorstribunal.org.uk/wp-content/uploads/2023/11/12476.2023.Dentons.Judgment.pdf
3. Client A was.
   1. The chairman of a state-owned bank in a former Soviet country who was later convicted of a string of offences, including embezzlement.
   2. His wife was subject to the first Unexplained Wealth Order as part of a high-profile money laundering investigation by the National Crime Agency (NCA).
   3. Although his identity is evident from the facts disclosed about him in the case, Client A was granted anonymity in the Tribunal.
   4. The transactions at issue included.
4. Client A’s purchase, via a holding company, of a property in 2014 for £7.9 million, partly funded by a “donation” of £800,000 from a company owned by a friend of Client A.
5. Around the same time [2014], Dentons also acted for Client A in the aborted purchase of a property valued at €95 million – approximately 16 times higher than it was sold for in 2004. 

• The SRA observed that “Client A had walked away from the transaction with a loss of €1 million was highly suspicious”.

1. Yet the firm received and paid €1 million from its client account before calling the deal off. 

A lone lawyer buys luxury London properties for Iraqi minister’s family.  

1. the SRA lost its appeal against a sole practitioner in the second case.  
2. It was found that George Fahim Sa’id did not commit professional misconduct. This was despite George Fahim Sa’id’s admission that his AML systems let him down when acting for the wealthy family of an Iraqi minister,
   1. https://caselaw.nationalarchives.gov.uk/ewhc/admin/2024/1619
3. Two particular property transactions were the focus of the SRA’s enforcement action against Mr Sa’id.
   1. Acting on instructions from the family in 2017, Mr Sa’id purchased a London hotel worth £27 million, partly financed by a cousin of the minister’s son and partly from proceeds of land sold in Iraq, which were transferred through a Dubai company owned by the minister’s brother.
   2. In 2018, the minister’s family instructed Mr Sa'id to buy a house in London using the expected sale of land in Iraq to one of their business associates.
   3. c. Although this informal plan fell through, and the business associate instead became the house owner in London, the property transaction remained high risk, with the business associate becoming Mr Sai'id's direct client.
4. These high-value property transactions involved the family of a government minister:-
   1. using cash that was derived from the sale of land in one high-risk country (Iraq) and
   2. transferred through companies in a second high-risk country (UAE) before entering the UK.
5. Given the different family members and business associates instructing, funding, and benefitting from these transactions undertaken by Mr Sa'id, there was also ample risk of these arrangements concealing money laundering.

A troubling trend

1. These recent cases show how two very different firms – the largest law firm in the world (by several lawyers) and a one-man band – similarly failed to do the proper source of wealth and funds checks on Politically Exposed Persons (PEP) from high-risk countries seeking to buy multi-million-pound properties in London. 
2. The SRA’s sectoral risk assessment lists inadequate source of funds checks among the “most common weaknesses” in firm controls. Meanwhile, the SRA’s Money Laundering Reporting Officer highlighted in their annual report for 2024 that conveyancing remained “by far the highest risk area for illicit finance and money laundering in our reports”. These two recent SRA cases highlight that transactions involving high-risk political actors seeking to invest their wealth in UK property remain a real Achilles’ heel for the legal sector.

Looking more closely at where things went wrong, some clear themes emerge.

• One common feature is complacency by lawyers whose personal knowledge of their clients caused them to overlook the risks of dealing with their affairs.

Familiarity breeds complacency

1. Mr Sa’id had a long-standing business relationship with the Iraqi minister’s family stretching back to 1999. Between 2011 and 2019, he conducted 14 transactions in which his firm received and paid out approximately £95.8 million on behalf of the family. 
2. In explaining his failure to do enhanced due diligence in two of these transactions –
1. the purchase of a £27 million London hotel and
2. a £8.5 million London house –
3. Mr Sa’id relied on the fact that he had known the family for many years, and these property purchases were consistent with his knowledge of the family and the commercial reality of business dealings in the Middle East.
4. His familiarity with the Iraqi minister’s family and business practices caused him to see no reason to ask more probing questions about high-risk transactions.

Taking comfort from a client with the ‘right’ connections

1. The client relationship partner who brought Client A to Dentons also relied on past engagements and his client's reputation to reassure the firm that everything was above board.
2. Francois Chateau explained that
1. “one of the reasons there was no suspicion on my side in any way, shape or form, is that he was the senior banker, extremely well connected with the right institutions, from the British Chambers of Commerce to Harvard”. 
3. Meanwhile, Dentons itself argued that it was reasonable to
1. “take comfort” from the fact that Client A was “already integrated into the regulated Western financial and legal system and been the subject of numerous AML checks by various reputable banks and law firms”. 
4. The Tribunal rightly rejected
1. this reliance on Client A’s established connections with “eminent and well-renowned law firms” and institutions to explain away the need for Dentons to do their source of wealth and source of funds checks. 
5. Dentons did make a good point, however, in question:-
1. why it has been singled out for regulatory action by the SRA, given the array of law firms who acted for Client A in transactions that have similarly been the subject of investigation by the NCA.
6. Clearly, serious questions must be asked about whether London firms collectively failed to do robust due diligence on these transactions and whether their involvement lent legitimacy to Client A, which was little more than smoke and mirrors.

Another striking theme in these two cases is that both firms were let off the hook because the Tribunal found them to have adequate AML systems in place despite slipping up regarding individual clients and specific transactions. 

Let down by the system.

1. The SRA’s assessment of Mr Sa’id’s firm in July 2017 found no deficiencies in his AML systems, and no concerns were raised about seven other case files shown to the supervisor in which he had relied on the same system to carry out AML checks. However, Mr Sa’id admitted that this system let him down in the two transactions that were the focus of the SRA’s prosecution following his failure to do enhanced due diligence. 
2. Among other things, Mr Sa’id failed to identify that the client or beneficial owner was a PEP or was the family member or close associate of a PEP. The risk of money laundering was assessed as medium despite the high risks posed by these complex transactions for the purchase of high-value properties involving funds transferred through UAE companies by family and business associates of an Iraqi government minister.
3. Yet despite acknowledging these oversights as “regrettable”, the Tribunal warned against “a counsel of perfection” on the SRA’s part. The Tribunal noted that Mr Sa’id was not in a position of having no system at all and that his system should not be considered inadequate because of a single failure.

Excusing “complete ignorance” in a “gold standard” system

1. the SRA did not criticise Dentons’ AML systems and processes. On the contrary, the SRA’s 2014 audit of the firm “struggled to think of anything negative to say” and reported in glowing terms about its “gold standard” systems. 
2. Yet, in relation to Client A, the SRA observed that key individuals at the heart of this system—the firm’s General Counsel, the Money Laundering Reporting Officer, and the Head of AML—did not communicate with each other about the risks that had been identified and the concerns that had been raised. The result was a collective failure to appreciate risks that slipped through the cracks of the firm’s apparently strong system. 
3. Dentons instead relied on the steps previously taken by Mr Chateau, the former chairman of the global board of Salans LLP, who brought Client A to Dentons when the firms merged in 2013. Mr Chateau was not an SRA-regulated solicitor and told the SRA’s forensic investigations officer that he did not question Client A’s source of wealth or funds because “it is not the culture” in Europe to ask how much someone earns. 
4. In its ruling, the Tribunal recorded the SRA’s characterisation of Mr Chateau’s responses as
1. “astonishing, evincing not only complete ignorance of the MLRs (which might be understood given that he was not an English lawyer) but also an extraordinarily credulous attitude towards individuals of apparently spectacular wealth”.
5. The SRA criticised the firm for not
1. conducting a “root-and-branch review” of measures taken by Mr Chateau in response to an intelligence briefing note in July 2014 recommending “extreme caution” in conducting business dealings with Client A.
6. Dentons had commissioned this report from the private intelligence agency KCS to ascertain whether Client A was a fit and proper person to be authorised by regulators to operate a bank in the UK. 
7. This report from KCS troubled the firm’s General Counsel, Mr Cheung, who voiced his concerns about the “high” risks associated with Client A:
1. “I am concerned he has cleaned his reputation online, and I find the reports of his involvement in the kidnapping of his wife to set up a political opponent and the theft of $1b from the bank he was Chair of without personal consequences disturbing.
2. This person is protected by the president and appears to be able to act in a way that would bring swift and permanent consequences to anyone else.
3. c. I feel these immediate risks are of a different nature to the oligarchs who benefited from perestroika and are now legitim[ised] to an extent internationally (e.g., Abramovich), though there are also some who, because of the way they conduct themselves, would not be appropriate clients of the firm.
4. It is not my call to determine the firm’s risk appetite on issues like this. Still, I don’t think we should be acting for this individual, particularly on his financial affairs.”
8. By contrast, Mr Chateau dismissed the intelligence briefing, and after the matter was escalated for consideration by the Managing Partner at the time, Mr Ransley, the firm proceeded to act for Client A without taking steps to:-
1. determine Client A’s salary and
2. shareholding at the state-owned bank.
9. The Tribunal described Denton’s failure to Client A as
1. “enduring”, with the firm and other partners who acted for Client A throughout the retainer all relying erroneously on Mr Chateau’s inadequate checks.
10. Despite this, the firm’s breaches of the MLRs
1. were considered to be “inadvertent” and “not systemic”,
2. with the Tribunal effectively giving an SRA-regulated firm a free pass to write off the failures of a non-SRA-regulated partner as a glitch in its otherwise sound AML system.

Given the failures of these firms in due diligence, it seems surprising that the SRA lost both cases.

The outcome is particularly puzzling, considering the Tribunal largely agreed with the SRA’s factual account of where compliance efforts fell short. In addition to this, the SRA only refers to what it considers to be the most severe cases to the Tribunal, and the result appears even more confusing. So, where did the SRA’s case come unstuck?

Handling suspect money is a matter of “professional judgment.”

1. This question was the subject of debate between the SRA and Mr Sa’id on appeal in the High Court, as they disagreed over whether the Tribunal had found a breach of the MLRs and the consequences that should follow from any breach.
2. The Tribunal agreed with the SRA’s account of the “factual matrix”, which showed Mr Sa’id should have classified the transactions as high risk had he correctly identified the involvement of a PEP.
3. But the Tribunal also found that a risk-based approach to money laundering is a matter of “professional judgment” rather than a box-ticking exercise and that Mr Sa’id had exercised that judgment within the bounds of what was appropriate. 
4. The High Court upheld this finding by the Tribunal and declined to overturn the Tribunal’s conclusion that Mr Sa’id’s failings did not amount to a breach of the MLRs.
5. As a result, the SRA’s case alleging professional misconduct fell at the first hurdle, and the High Court did not have to answer the further question as to whether a breach of the MLRs automatically amounted to a breach of the SRA’s Principles and Code of Conduct. 

Breaking AML rules without breaking professional rules

1. The SRA’s case against Dentons progressed further in the Tribunal, with the Tribunal finding that the firm had breached the MLRs by failing to do adequate checks to establish Client A’s source of wealth and funds.
2. However, the Tribunal sided with Dentons, holding that only a breach that was “serious, reprehensible and culpable” would amount to professional misconduct.
3. In the Tribunal’s view, the firm’s breach of the MLRs
1. “was entirely inadvertent and thus fell within the small category of cases where wrongdoing did not amount to professional misconduct”.
4. At this point, the SRA’s case against Dentons hit a snag: the Solicitors’ Disciplinary Tribunal can only impose sanctions where there is a breach of the SRA Principles or Code of Conduct, not a breach of the MLRs. This means that despite successfully establishing the firm’s breach of the MLRs, the SRA lost its case and had to bear the costs of bringing the prosecution before the Tribunal. 
1. https://www.lawgazette.co.uk/news/sdt-dismisses-case-against-dentons-as-sra-left-with-massive-costs-bill/5119021.article
5. This disconnect between the MLRs and the SRA’s professional rules gives rise to the severe anomaly that law firms can breach the legally binding obligations imposed on them through the MLRs without consequence, so long as these failures are not considered severe enough to amount to professional misconduct.

Ineffective enforcement of AML standards

1. Taken together, these two decisions leave some troubling questions unanswered about law firms' accountability for full compliance with their AML obligations.
2. The SRA considered the failings severe enough to justify referral to the Tribunal – not least because the SRA is still only able to fine traditional law firms up to £25,000. 
3. Changes introduced under the Economic Crime and Corporate Transparency Act that would have enabled it to impose unlimited fines without referring to the Tribunal have yet to take effect while the SRA consults on them.
1. https://www.sra.org.uk/sra/news/press/financial-penalties-consultation-2024/
4. Furthermore, once the new rules take effect, those changes will only apply to any money laundering breaches investigated. 
5. As a result, both firms were ultimately let off the hook for shortcomings in AML checks that were either admitted or established based on the facts.
1. In Mr Sa’id’s case, the failing was made out on the facts but did not amount to a breach of the MLRs,
2. in Denton’s case, there was a clear breach of the MLRs, but this wrongdoing did not amount to professional misconduct. 
6. Whichever way you look at it, the outcomes in these cases raise genuine concerns about how seriously AML failings are taken and how effectively they are enforced in the legal sector. At the very least, it underscores the urgency of giving the SRA unlimited fining powers to ensure it can sanction breaches of the MLRs without also needing to establish professional misconduct.

5. Lawful but awful: The battle between ethics and profit in firm culture

1. Taking a step back from how the legal lines are drawn in policing lawyers' AML obligations, these cases raise timely questions about the ethics of client choice.
2. In particular, the decision by Dentons to act for Client A offers an illuminating account of the reputational risks and ethical judgments that law firms navigate. 
3. While the SRA's enforcement action focused on only a couple of transactions, Dentons acted in 38 matters for Client A or associated entities, terminating the client relationship only after he was convicted and imprisoned.
4. In addition to high-risk property transactions that have been the subject of an investigation by the NCA, Dentons also provided
1. tax advice to Client A and
2. was instructed in a matter dubbed ‘Project Fire,’ which sought to obtain authorisation from regulators that he was fit and proper to operate a bank in the UK.
5. Irrespective of whether Dentons acted in compliance with their legal obligations under the MLRs, the evidence presented before the Tribunal exposed the vulnerability of even “gold standard” compliance systems to pressure from senior partners and the profit incentives that drive firm culture. 
6. Following the receipt of the intelligence briefing note urging “extreme caution” in engaging in business with Client A, Mr Chateau berated the firm’s General Counsel for having poor business judgment when concerns were raised about the reputational consequences of proceeding to act for Client A. 
7. Ultimately, the firm’s Global Managing Partner overruled any reservations about acting for Client A, showing how easily the push for profit overpowers ethical reservations about engaging in ‘lawful but awful’ work for clients from kleptocratic and authoritarian regimes.
8. Indeed, it was stated explicitly by Dentons in their defence that they were not required to refuse money from illiberal undemocratic regimes or question the historical source of wealth acquired through such systems:
1. “In discharging its obligation under the MLRs, the Firm was not required to form a value judgment about that country's political and economic system”. 
9. This may be true as a reflection of the law, but the evidence before the Tribunal leaves the public with a troubling picture of how senior partners can be so dismissive about serious ethical questions of client choice.
1. https://www.ibe.org.uk/knowledge-hub/legal-profession-taskforce.html
10. This adds to the perplexity of a ruling which concludes that the firm’s conduct is consistent with the obligation to “uphold public trust and confidence in the solicitors’ profession”.
1. https://www.sra.org.uk/solicitors/standards-regulations/principles/

Conclusion

1. the SRA
1.  lost its appeal in Mr Sa’id’s case, https://www.legalfutures.co.uk/latest-news/sra-fails-in-appeal-over-solicitor-cleared-of-aml-breaches
2. has decided to take its case against Dentons to the High Court. There is a huge amount at stake in this appeal. https://www.legalfutures.co.uk/latest-news/sra-to-appeal-decision-to-clear-dentons-over-aml-breaches
2. If left standing, the Tribunal’s ruling will damage the credibility and effectiveness of the UK’s AML regime, exposing serious gaps that leave the most significant legal sector supervisor powerless to sanction breaches of the law. 
3. But it will also send a disheartening message to the public about the accountability of law firms for their role in combatting money laundering and upholding ethical standards in the profession.

All the above is Sourced from

• https://www.spotlightcorruption.org/falling-at-the-first-hurdle-what-two-recent-cases-against-law-firms-handling-suspect-money-show-about-the-uks-anti-money-laundering-enforcement-regime/