Am I my corporate’s keeper? Anti-money laundering gatekeeping opportunities of the corporate legal officer

ABSTRACT

This article analyses the importance of including corporate legal officers (also termed general counsel or chief legal officers) in the anti-money laundering (AML) international standard set by the Financial Action Task Force – in particular, the Recommendations dealing with the legal profession. It deconstructs the origins and development of the standard and explores the reasons that led to the inclusion of the legal profession in the AML regime and the ways in which the standard has reshaped regulatory regimes globally. The article fills a void in the existing literature by contemplating the future of the legal professional and the role of corporate legal officers, providing a case study of a profession that is not (yet) required to comply with the AML international standard. This approach differs significantly from that of other literature in the field, which deals comprehensively with the appropriateness of including legal professionals in the AML regime, without considering the impact of exempting CLOs from the regime. The article aims to demonstrate that an understanding of the role of CLOs in the legal profession can shed light on the gaps in the international standard and the consequent risks to the AML regime.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This article does not encompass non-employee CLOs, who are designated as general counsel (see Nelson 1988), or law firms that serve as CLOs for clients (see Shapiro 2002). For general discussion on CLOs, see DeMott (2005).

2 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 19 December 1988, entered into force 11 November 1990, UN Doc E/CONF.82/15 (1988), art 3(1)(b)(i).

3 For example, the Palermo Convention states that participating countries must apply the definition of money laundering to “the widest range of predicate offences”: United Nations Convention against Transnational Organized Crime, 15 November 2000, entered into force 29 September 2003, 2225 UNTS 209, art 2(2).

4 For an “enable, distance and disguise” model, which arguably encompasses a wider range of facilitation and laundering conduct, see Platt (2015, 31).

5 For a discussion on whether it would be possible and effective to identify key warning signs that might justify imposing AML requirements on legal professionals, see Middleton & Levi (2004). See also Law Council of Australia (2017).

6 In Italy, for example, notaries are not permitted to draw deeds of transfer for real estate without determining the source of the funds. Some countries, including France, require that all funds made available to a lawyer as payment for services, or for transactions in which the lawyer acts on behalf of a client, are paid into an account that is managed by the relevant bar association. A proposed reform in Norway would require lawyers to open a separate bank account for each client, registered in the names of both the lawyer and the client. This would enable authorities to obtain information regarding account transactions directly from the bank, without any disclosure from the lawyer. See International Bar Association & Secretariat of the Organisation for Economic Co-operation and Development (2019, 9).

7 See Joined Cases T-125/03 and T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission of the European Communities (17 September 2007).

8 See Case 155/79, AM & S Europe Limited v Commission of the European Communities (Judgment of the Court, 18 May 1982), paras 21, 27.

9 In late 2002, a Brazilian national moved to New Zealand despite being on bail in Brazil. He opened a few bank accounts and, during a three-month period, over NZ$3.5 million was deposited into the accounts via international money transfers. After he left New Zealand in mid-2003, 40 more accounts were opened on his behalf by a lawyer who later faced money laundering charges. See Asia/Pacific Group on Money Laundering (2011, 53).

10 For a critical discussion on the opportunity for the legal profession in Canada, Australia and the US to meet with the FATF, see Terry & Llerena Robles (2018).

11 For the argument that little available evidence seems to demonstrate that the costs of the regime produce commensurate benefits, see Law Council of Australia (2017, 15).

12 CDD includes verifying the identity of the client and the beneficial owner where relevant, as well as understanding the nature and purpose of the business relationship (including the source of funds). CDD records must be maintained.

13 For the EU, see Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, which refers to “independent legal professionals” (art 2) and to service providers who are not employed by their client, such as in-house counsel. See Shaughnessy (2002, 37); Case 155/79, AM & S Europe Ltd v Commission, 1982 ECR 1575, 1613. See also Kirby (2008, 284). In Canada, legal professionals are subject to the Criminal Code but are exempted from the federal legislative regime under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act due to constitutional principles. The Canadian legal profession has adopted model rules for lawyers and notaries that are designed to reflect the government’s legislative objectives under that Act. See AML/CTF Working Group, Federation of Law Societies of Canada (2019, 8).

14 Conventional scepticism about the independence of in-house corporate lawyers focuses on their exclusive relationship with a single client (their employer), making it difficult to withdraw from representation if professional norms so require. See Dzienkowski & Peroni (2002, 518).

15 For the effect of briberies after the enactment of the FCPA, see Bagley et al. (2016, 429).

16 Any company with a class of securities listed on a national securities exchange in the United States, or with a class of securities quoted in the over-the-counter market in the United States and required to file periodic reports with the Securities and Exchange Commission, is an issuer. See 15 USC §§ 78l, 78o(d).

17 Any individual who is a citizen, national or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship that is organized under the laws of the United States or its states, territories, possessions or commonwealths, or that has its principal place of business in the United States, is a domestic concern. See 15 USC § 78dd–2(h)(1).

18 15 USC §§ 78dd–1(a), 78dd–2(a), 78dd–3(a). This requirement is known as the “business purpose test”: see United States House of Representatives (1977, 12). See also Criminal Division of the US Department of Justice & Enforcement Division of the US Securities and Exchange Commission (2012, 12); Earle & Cava (2018, 386).

19 The risk is greater in financial centres where CLOs are closely familiar with diverse monetary transactions. In the United Kingdom, for example, one-third of CLOs are employed in financial services (see Moorhead et al. 2019, 47).

20 CDD includes verifying the identity of the client and the beneficial owner where relevant, as well as understanding the nature and purpose of the business relationship (including the source of funds). CDD records must be maintained.

21 Yeoh (2014) argues that preliminary indications from money laundering scandals demonstrate that whistleblowing may have reduced the magnitude of the adverse consequences.

22 As a member of the management team, a CLO is compensated to reward increases in firm value. The CLO may discount his or her gatekeeping function in order to align the CLO’s own incentives with those of the CEO and the CFO. See Bird et al. (2015, 2); Morse et al. (2014); Nelson & Nielsen (2000).