AML Spotlight on international arbitration – International arbitration provides a very tempting proposition for organised criminals seeking an apparently legitimate cover for moving large amounts of criminally obtained money from one jurisdiction to another.

The laundering methodology behind the use of arbitration, as with litigation, is that criminally sourced funds are placed in what appears to be a legitimate business. A dispute is then created with another front business or individual to justify the payment of funds between the parties.

To add further legitimacy the criminals will seek to pass the funds through the lawyers’ client account on both sides of the dispute.

While the dispute could be about a debt relating to supplies, the reality is that any dispute could be created relating to a contract where the result sought is damages or the transfer of money or assets, such as shares.

Arbitration may be more attractive than litigation for criminals as the documents are not put on the public record and all hearings are in private.

Warning signs

As with litigation, it can be difficult to spot the difference between legitimate arbitration on the one hand, and sham arbitration being conducted for the purpose of money laundering on the other. Some warning signs to be alert to are:

the dispute is very one sided. If the issues being raised in the dispute are covered by clear terms in the contract and settled law, and seem to lead to the very obvious conclusion that one side should win; ask yourself why the parties are incurring legal fees to deal with the matter.
lack of documentation. If there is a lack of contemporaneous documentation which will evidence the background to the dispute, or the client is unwilling to provide you with such information, then there is an increased risk that the dispute is fabricated.

lack of activity on the part of the business.

While some criminals will go to the effort of setting up and running a real business as a front for criminal activity; businesses which are actually operating often need to register for tax, file accounts, and could be subject to inspection by trading standards or other regulators. As such, shelf companies or other dormant front business can be preferred laundering vehicles for criminals. Consider whether the businesses on either side of the dispute have the type of web presence, directory or registry listings and accounts that you would expect to see for the type of business they purport to be.

But arbitration is not money laundering

Arbitration, like litigation, is not covered by the Money Laundering Regulations 2007. As such the collection of client due diligence information is not required by law. However, that does not preclude firms making enquiries about the identity of the business and its owners for the purposes of really understanding their client’s needs and circumstances, as well as preventing money laundering or other types of crime.

Following the decision of Bowman v Fels [2005] EWCA Civ 226, genuine litigation and genuine arbitration will not amount to an arrangement for the purposes of s328 of the Proceeds of Crime Act. However, sham arbitration will still be money laundering.

If a lawyer, or even the arbitrator, suspect that they are concerned in sham arbitration which involves the proceeds of crime, they will need to consider the principal money laundering offences. They will either need consent to be able to proceed and obtain a defense to money laundering. Or, having considered their relevant ethical obligations, they will need to cease acting.

If the firm’s MLRO suspects that the firm is concerned in sham arbitration which involves the proceeds of crime, they will need to consider the failure to report offence under s332 of the Proceeds of Crime Act.

Before making a report under either set of provisions, you will need to consider whether the information which led to the suspicion of money laundering is privileged. In the case of sham arbitration, the crime/fraud exemption may act to remove the privilege; although you will need strong prima facie evidence that you are being involved in a crime, rather than a mere suspicion.

The international angle

Arbitration may take place anywhere around the world. If, however, there is an aspect of your involvement in the arbitration which takes place in the UK, then it is likely that the principal offences and the reporting obligations under the Proceeds of Crime Act will still apply.

Further, while some countries may not have specific reporting obligations for lawyers, most have the principal money laundering offences, which a lawyer will be subject to if they proceed with sham arbitration abroad involving criminal property.

http://www.lawsociety.org.uk/newsandevents/news/view=newsarticle.law?NEWSID=446373