Forbes Magazine: Lawyers, realtors facilitate money laundering

by Diane Francis


Doctors, nurses, teachers, and therapists are required to protect client confidentiality, but as a matter of public interest, they must also report cases of abuse. It is time to make lawyers, accountants, and real estate agents do the same.

In 1988, the proliferation of drug trafficking worldwide led the United Nations to crack down on money laundering. The G7 then created the Financial Action Task Force to set standards and audit governments. Ever since banks have gradually been brought to heel, but lawyers have devised more sophisticated schemes to circumvent laws and frustrate law enforcement. Today, illicit capital flows slosh through complicated legal structures spanning multiple jurisdictions. Crime and terrorism prosper as poor countries are looted by thieving officials or oligarchs aided and abetted by Western lawyers.

In December 2016, the Task Force gave the United States a failing grade and recommended several “priority actions.” These included a federal requirement that beneficial ownership information is available for inspection by the authorities on request; closing loopholes involving high-end real estate; and requiring lawyers to identify their clients’ beneficial owners and report any suspicious financial transactions.

While U.K. and E.U. lawyers are obliged to alert officials about suspicious client behavior, their American and Canadian counterparts have so far fended off legislative change. The two countries must reform in sync because they are so financially entwined that they work for hand in glove to frustrate requirements. A case in point is the strange requirement that the identity of donors, particularly foreigners, to the Clinton Foundation must be disclosed. But a “subsidiary” trust was set up in Canada for Clinton Foundation donors whose names are not disclosed under local rules.

In 2002, U.S. Treasury officials speculated about bringing lawyers to heel, but backed off following objections by the American Bar Association. Canada did pass legislation, but the Law Society of British Columbia – where money laundering is rampant – convinced the Supreme Court of Canada that the laws abrogated client rights.

“The government is preparing another attempt to meet Task Force recommendations,” said Josee Nadeau, a consultant and former Financial Crime official in Ottawa, at a Canada-U.S. Law Institute conference recently. “But the U.S. didn’t even try and I don’t think they will.”

Some lawyers accede that the Task Force concerns are reason enough for the American Bar Association to establish tougher legal ethics rules. In Law360, Kevin Shepherd agreed tougher rules were required because existing ethical ones were not enforceable and compliance was voluntary. He rejected federal intervention, arguing that a client due to diligence obligation should be imposed on lawyers and policed by state bar agencies.

Of course, self-regulation rarely works. The British Columbia Law Society recently brought a disciplinary action against a Vancouver lawyer for letting nearly $26 million in offshore funds pass through his trust account in four months, even though he did not provide legal services. Such cases often end up as nothing more than wrist slaps, but the damage has been done. Just one unethical lawyer or law firm can corrupt the global interdiction and enforcement system. “Many lawyers are ‘willfully blind’ to the origins of offshore cash flowing through legal trusts and into real estate,” commented an investigator during the hearing.

Such cases are rare in Vancouver, even though the city has the highest residential estate prices in North America due to a flood of hot money from China and elsewhere. A forest of tall condos, empty most of the time, dominate the city’s scenic harbor. It’s another skyline built by hot money, and that has created social problems. The city’s average home price was $1.83 million in 2016, the highest in the Western Hemisphere, and beyond the reach of its middle class.

Similar stories about lawyer’s trust accounts have been reported in the United States. In 2016, a high-profile case involving the bilking of the Malaysian state fund 1MDB included the fact that hundreds of millions of dollars were siphoned from the fund through prestigious American law firms’ pooled accounts. “These accounts were used by suspects in a multibillion-dollar scandal… according to a Justice Department description of events. They also played a part in a Florida Ponzi scheme,” wrote the Wall Street Journal.

Clearly, client confidentiality and legal privilege do not always serve the public interest. Lawyers should now be deputized in this struggle against a parallel, unaccountable shadow global economy. The British, Europeans and Australians have brought their legal fraternity to heel, and so must the U.S. and Canada, or the two will remain prime destinations for hot money and fugitives. If this scourge remains unaddressed, the estimated $32 trillion worth of untaxed offshore funds will double and redouble. Unless all the world’s financial transactions are policed and taxed, the rich will get richer and the rest of the world will get potholes, social unrest, and political instability.

Diane Francis is an advisory council member of the Kleptocracy Initiative at Hudson Institute and Editor-at-Large of the Financial Post. She is the author of “Contrepreneurs: Stock-Market Fraud and Money Laundering in Canada.”


First published in Forbes Oct. 20, 2017