Solicitors given new money-laundering alert
14 Aug 06
Law Society of Scotland issues warning over escrow requests
Scottish solicitors have been warned to be alert to a new type of transaction with potential money laundering implications.
The Law Society of Scotland has posted a warning on its website after becoming aware in the last few days of more than one transaction in which a firm of solicitors in Scotland was invited to hold money in escrow on behalf of clients based abroad.
"In 15 years the Professional Practice Department of the Society has not been consulted regarding such an arrangement", commented James Ness, Deputy Director of the department. "That we now have more than one this week with identical principal features (although the jurisdictions and personnel are different) might indicate a pattern."
In broad terms, the cases to have emerged to date involve new clients coming to a firm and instructing wills or some routine business. The clients are based abroad but wish wills which will deal with Scottish property and assets which they have here. ID is provided and this piece of business proceeds smoothly.
Some time later the clients contact the solicitors from abroad (a variety of jurisdictions appear to be involved) advising that they are selling their property abroad. It is explained that under the laws of the relevant jurisdiction the price is normally held in escrow by a trusted third party while the transaction is processed. The purchaser however does not live either in Scotland or in the relevant jurisdiction and accordingly the funds are coming from a third jurisdiction.
For this reason the client proposes that the funds should be held independently in the hands of the Scottish agent. Accordingly the Scottish agent is invited to receive the funds from the purchaser (who is not a client) through an offshore bank.
Mr Ness said that while it was perfectly possible that such a transaction was entirely proper, there were several obvious concerns, apart from the sudden emergence of a pattern.
First, because the Master Policy professional indemnity insurance covers "business customarily conducted by solicitors in Scotland", solicitors asked to participate in transactions of this nature should consider carefully the position in regard to insurance cover.
Another cause for concern, he added was that "When one stands back from this transaction and looks at what exactly is happening, it is not unreasonable to conclude that the Scottish solicitor has been invited to act as a banker. Funds are to be deposited and withdrawn. The solicitor only represents one of the two parties and will not represent either of them in the actual transaction."
He continued: "Given that the solicitor is not a participant in the transaction and it is taking place in a foreign jurisdiction, it is difficult to see how the solicitor could be satisfied that the transaction exists at all or whether the appropriate trigger events in relation to the funds in escrow will have taken place properly or otherwise."
The Society urges its members to be vigilant in considering both the relationship between themselves and their clients and the actual nature of transactions in which they are invited to participate.