An Anti-Money Laundering

Framework for Lawyers

Introduction

The Law Society on 1 March 2003 published its current guidance note for lawyers on the prevention of money laundering and the funding of terrorist activities, following its first guidance note published on 30 September 1998.

‘Money laundering’ is a popular term to describe a process by which criminals conceal illicitly acquired funds by converting them into legitimate income to enable them to maintain control over the same under the cover of a legitimate source of income.

In the current guidance note, the laws applicable in Singapore to prevent money laundering and funding of terrorist activities are described as well as the features and circumstances when a lawyer ought to ‘red flag’ suspicious transactions. The guidance note is posted on the Society’s website www.lawsociety.org.sg under the Members’ Homepage under the icon ‘General Practice’.

In the guidance note, the Society recommended that it was important for lawyers to ‘Know their client’ and business in order to avoid inadvertently assisting or facilitating criminals or terrorists in their activities or cause in the course of the provision of legal services.

This year, the Legal Profession (Professional Conduct) Rules (‘the Rules’) will be amended to require lawyers to obtain satisfactory evidence of the identity of their clients to ensure that they are dealing with a ‘real person’ or ‘body’ (natural, legal or corporate) before accepting to act for them.

Under amendments to the Rules, this ‘Know your client’ requirement will be cardinal professional duty for every lawyer/law practice to comply with before a solicitor-client relationship is established, from time to time and before any money is deposited in the law practice’s client account. A practice direction will be issued by the Council to further explain practice compliance issues under the proposed rule changes.

The amendments to the Rules are necessary to ensure Singapore lawyers meet standards required by the inter-governmental body called Financial Action Task Force (‘FATF’) set up under the auspices of the Organisation for Economic Co-operation and Development for non-financial businesses and professions to combat money laundering and terrorist financing. A list of member countries of FATF which includes Singapore can be found at its website www.fatf-gafi.org.it that also lists non co-operating countries, which does change from time to time.

As these changes will no doubt add to the costs of practice, the Law Society is drafting an anti-money laundering manual to particularly help sole, small and medium sized practices to have a template of standard forms to effectively check and satisfy the new anti-money laundering Rules.

Under amendments to the Rules, the Council of the Law Society will be empowered to carry out an inspection of a law practice to ascertain if ‘Know your client’ rule changes have been complied with by the practice.

Anti-money laundering obligations will particularly affect lawyers and law practices that receive moneys especially to set up businesses/companies or investment, or for sale or purchase of real estate.

Know Your Client

Under the new Rules, every lawyer/law practice must not open and maintain any account for or hold and receive moneys from any anonymous source or from a client with an obviously fictitious name. Every law practice must establish suitable arrangements to determine for new matters, the identity of a client when accepting instructions and in the case of the following matters, the nature and purpose of a business relationship:

1   buying and selling of real property;

2   managing client money, bank, savings or securities accounts, securities or other assets;

3   creation, operation or management of corporations, trusts, partnerships or similar structures;

4   buying and selling of business entities on behalf of a client; and

5   complex, unusual large transactions and transactions that have no apparent economic or visible lawful purpose for the client.

If a client refuses to provide satisfactory evidence of identity or information required at the time of accepting instructions and from time to time, then a lawyer and the law practice must refuse to act or withdraw from representing the client. The arrangements to establish the identity of the client and the purpose of the business relationship for the transactions described in points 1 to 5 above must at the time of engagement and from time to time, achieve the following:

1   ascertain the identity of the client;

2   if money or securities is to be held for the client by the law firm, identify the legal and beneficial owners of moneys or securities to be deposited or held by the law firm; and

3   ascertain where possible, the intended purpose and business relationship between the client and third party of the transaction.

How to Check Your Client’s Identity

An individual

A law practice will turn to objective evidence to establish the identity of its client. A lawyer may, in certain cases, have to ask himself who exactly is the client, for example, if the practice is acting for one of a group of companies or acting on instructions of another law practice or professional firm or bank.

Certainly, if a client is a foreigner or a business/company from a country on the FATF list of non co-operative countries, a law practice should consider whether more checks need to be carried out even with third parties before a relationship is established.

To establish the identity of an individual client, a lawyer will request sight of and take a copy of the original copy of the national identity card (‘NRIC’) or passport, and employment pass or work permit (as the case may be) and if instructed by an agent, under the current 
r 23 of the Rules, establish the authority of the agent to instruct the practice and, under the proposed rule change, establish the identity of the 
principal client.

Trusts and corporate clients

As trusts do not have a separate legal personality and trusts are a popular vehicle for money launderers (offshore trusts particularly), a lawyer must carefully check the identities of trustees.

Similarly, company structures are attractive to money launderers but law practices should distinguish between dealings with listed companies and private companies. If a company is listed in a Singapore recognised stock exchange or investment exchange or a FATF member country exchange, no further identity evidence is required beyond listing evidence. For banks or investment or finance companies regulated again under another FATF member country, similar evidence of registration or listing will be sufficient to establish identity.

For a private company, a lawyer will usually require a copy of the certificate of incorporation, list of directors, shareholders (their names and contact addresses) and its registered address. In addition, where practicable, obtain evidence of identity of the director or shareholder instructing the practice in person for the matter. It may be necessary to make checks about the beneficial ownership of the company if it comes to the lawyer’s attention that the ownership is with mere nominees.

If the client is a new subsidiary of a company of an existing client for which a check has already been made recently, evidence of the subsidiary will still be required to meet the ‘Know your client’ requirement.

Partnerships and limited liability partnerships (‘LLPs’)

For a partnership, lawyers obtain evidence of the identity of the partners instructing the practice and necessary evidence that their business is registered. In the case of a law practice, a lawyer can check with the Law Society or its online directory and for other professions, with their professional bodies.

As LLPs are separate legal entities, lawyers will require evidence of establishment of the LLP and establish the personal identity of the partner instructing the practice on the matter.

Politically exposed persons (‘PEPs’)

FATF defines PEPs as individuals who are or have been entrusted with prominent public function in a foreign country, for example, a head of state or government, senior politician, senior government, judicial or military official, senior executive of state owned companies or important political party official.

For such persons, a law practice in addition to performing the normal ‘Know your client’ due diligence measures, should obtain senior management approval of the law practice to act for such clients and take reasonable steps to establish the source of wealth or funds of the client.

Letters of Engagement

As part of good client care a law practice must, in its standard term of engagement letter, state why under the law, as lawyers you now require proof of identity through completion of the practice’s standard form with supporting identity documents before you accept a retainer. You should also advise the client that, in law, you will be required to report to the relevant authorities if you know or suspect that a transaction you are acting on behalf of a client involves money laundering and you may do so without informing your client of the same as the law prohibits ‘tipping off’ for money laundering or anti-terrorism offences. Finally, advise your client in your letter of engagement that relevant authorities can direct you to disclose documents to them and you must do so unless the law of solicitor-client privilege is applicable. This is discussed further under the heading ‘Keeping Records’.

Keeping Records

Finally, keeping records to prove you took steps to establish the identity of your client will be a new compliance rule for law practices. Every law firm must retain for five years (after the matter is completed) the documents it used to determine the identity of its client. Further copies all records of transactions for matters undertaken for the five types of transactions described under the heading ‘Know Your Client’ must be retained also for five years if required to be given to competent authorities when requested. Disclosure of information/documents must be refused by a lawyer if it involves a breach of solicitor and client privilege recognised by Singapore law.

Awareness of the Rule Changes and the Law

The Law Society will hold seminars on the new anti-money laundering rule changes, the first of which will be conducted under the Society’s annual Legal Practice Management course to be held in March 2006.

Members must be aware of relevant laws in Singapore on anti-money laundering and funding of terrorist financing which are summarised in Council’s guidance note of 2003. The guidance note also describes the duty of every person to disclose what is termed as a ‘suspicious transaction report’ to the police (subject to solicitor and client privilege) if he suspects any property or money he holds represents proceeds of drug trafficking or belongs to a terrorist or terrorist entity under the following two Acts:

1   The Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act.

2   The Terrorism (Suppression of Financing) Act 2002.

Yasho Dhoraisingam

The Law Society of Singapore

E-mail: yasho@lawsoc.org.sg