When attorneys take dirty money in trust

Dear Corruption Watch,

You’ve been writing about tracking the proceeds of corruption. I’m told that law firms maintain large trust accounts for their clients. Is this not also a way of hiding, or laundering, the proceeds of corruption?

Curious

Dear Curious

The trust account is an essential part of an attorney’s practice. By law, any money paid in trust by a client to an attorney is required to be paid into the attorney’s trust account. South Africans generally have a high degree of confidence in the safety of their funds when they are kept in their attorney’s trust account.

As a result, large sums of money flow through certain attorneys’ trust accounts for a wide range of transactions, including sales of property.

Any institution that is the conduit for flows of large sums of money is attractive to criminals who want to launder funds.

Because an attorney’s trust account can be used to hide the source and origins of funds, it lends itself to money laundering. As two academics at the University of the Western Cape have put it, the trust account “is akin to a one-stop laundromat: money goes in dirty on one side, wends its way through an unbroken cleaning cycle and emerges spotless on the other side”.

Trust accounts are susceptible to such abuses in several ways. The attorney may use the trust account to launder the proceeds of his or her own criminal activities. Alternatively, the attorney’s trust account may be used without his or her knowledge to obscure the source of funds, for example, when crooked clients make deposits as payment for simulated transactions and then receive clean money back when the transaction falls through.

Keeping control over the movement of funds

For this reason, there are important legal controls over the management and use of trust funds. They include :

• The Attorneys Fidelity Fund requires an annual audit of every attorney’s trust account to determine whether the attorney qualifies for the fidelity fund certificate, which he needs to practice;
• The Financial Intelligence Centre Act creates a range of duties, including customer identification, record-keeping requirements and internal controls. Although it does not expressly deal with attorneys’ trust accounts, all the duties apply to attorneys’ operation of such accounts;
• The act requires attorneys to report any cash transactions above a certain size;
• It requires attorneys to report any suspicious or unusual transactions;
• Failure to comply with these requirements is an offence and carries a maximum penalty of 15 years’ imprisonment or a R10-million fine;
• The attorney is also prohibited from telling any person, including his client, that he has made the required disclosure. In other words, tipping off one’s client also constitutes a crime under the act.

These provisions may place some strain on the relationship of trust between an attorney and client. They require the attorney to inform on the client, thus breaching the relationship of trust between them. However, in our view this is plainly justified to avoid the abuse and criminality that could otherwise result.

The potential abuse of trust accounts may be a particular problem for criminal lawyers. The clients of criminal defence lawyers will often be suspects in criminal matters.

They are accordingly likely to deposit the proceeds of crime into the accounts of their attorney to be used later to cover legal expenses. As a result, defence lawyers are much more likely to be paid with dirty money than other professionals.

Despite the strong statutory regulation of trust accounts, there have been few cases in which South African attorneys were prosecuted for money laundering. Again, the problem appears to be enforcement, rather than the substantive provisions of our law.

• This article was first published in Sunday Times: Business Times