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GUARDING THE LEGAL PROFESSION AGAINST MONEY LAUNDERING

Posted 21 June 2022

Elize Fourie

The legal profession was identified as potentially highly vulnerable to being abused by criminals to launder their proceeds of crimes in a report released by the Financial Intelligence Centre (FIC) on 17 March 2022.

Money laundering can be described as the disguising of illicit gains derived from criminal activities so as to appear as legitimate gains.

Certain products and services provided by the legal profession make them potentially vulnerable to money laundering abuse, such as conveyancing, conducting business in a customer account and the formation and management of legal entities. Cash is often used as the method of payment for such services, which increases the money laundering risk profile of legal practitioners.

When dealing with their clients, the FIC report states that legal practitioners should be aware that some clients, such as foreign prominent public officials (FPPOs), domestic prominent influential persons (DPIPs), complex legal structures or foreigners potentially pose a higher risk for money laundering. Such risks are evident with clients trying to conceal their identities, transactions being inconsistent with their stated income or occupation, the use of an unusual source of funds to transact, transactions that do not have a legitimate or economic reason, or when clients cease their business relationships upon a request for customer due diligence (CDD) information.

Examples of transactions that are potentially high risk for money laundering include the use of cash or crypto currencies, the reversing of transactions with a request to repay funds already paid and transactions that do not make economic sense. A legal practitioner must also consider the use of cash in the buying, selling and renting of properties or other assets by their clients, where applicable. In South Africa, cash is still used extensively and poses an increased risk of money laundering.

There are also risks relating to delivery channels that may obscure or conceal the true identity of the client, or that result in clients not being on-boarded face-to-face. Where an intermediary or third party is used, a legal practitioner must do proper due diligence.

In terms of geographic risk, it should be noted that some foreign jurisdictions pose a higher risk for money laundering. The geographic location and services provided by the legal practitioners are also important factors for determining ultimate money laundering risks. Criminals are attracted to high-value assets, particularly high-end immovable property in exclusive or seaboard areas in South Africa, and therefore legal practitioners need to be vigilant when conducting business in areas where such assets are acquired.

The inherent risk of money laundering for the legal practitioners’ sector in South Africa is classified as high. Take extra care with cash and international transactions, third party transactions and the use of new payment technologies such as crypto currencies. Be aware of anonymous and high-risk clients, as well as trusts, shell companies and other legal arrangements that attempt to conceal the true identity of the beneficiary. Organized crime can use legal practitioners to conceal proceeds of crime, obscure ultimate ownership through complex layers and legal entity structures, avoid paying tax, work around financial regulatory controls, create a veneer of legitimacy to criminal activity, create distance between criminal entities and their illicit income or wealth, avoid detection and confiscation of assets, and hinder law enforcement investigations.