Reforms in Anti-Money Laundering and Their Impact on Legal Practice
Law firms play a crucial role in upholding the integrity of the legal system and ensuring compliance with anti-money laundering (AML) regulations. It is a common misunderstanding that money laundering regulations only apply to financial institutions. However, law firms are at a high risk of money laundering. This article explores law firms’ significant responsibilities and contributions to combating money laundering.
What is money laundering, and why are law firms considered high-risk in this illicit practice?
Money laundering is, as the name suggests, the process of laundering money resulting from criminal activity, referred to as “dirty,” to make it appear “clean” and legitimate. Money laundering refers to disguising the origins of significant sums of money obtained through illegal means, such as drug smuggling, human trafficking, and financing terrorism, to make them appear lawful.
Individuals who engage in illicit financial, corporate, or real estate transactions may seek the assistance of lawyers to create an appearance of legitimacy. One example is when legal services transfer funds through a law firm’s customer accounts. This could be done either to make the funds appear legitimate or to exploit the professional status of the firm to add credibility to a transaction.
Therefore, it is the ethical responsibility and obligation of lawyers and law firms to be conscious and refrain from facilitating illegal activities. Legal professionals are responsible for following their AML and know-your-customer (KYC) obligations and implementing the appropriate procedures to prevent involvement in the scheme.
Bahrain’s vast banking network, along with its status as a transit point along the Gulf and into Southwest Asia, may attract money laundering activities. It is essential for one of the primary financial hubs in the Middle East to comply with and uphold the international standards of AML. Bahrain is considered one of the leading countries in the Gulf Cooperation Council (GCC) when it comes to its AML practices. It is part of the Financial Action Task Force (FATF) through the full membership of the GCC in the FATF. It is committed to the implementation of all international standards in this area. Bahrain is also a founding member of the regional MENA-FATF and hosts its secretariat.
Requirements for Lawyers and Foreign Law Offices in Bahrain’s AML Legislation
The Ministry of Justice, Islamic Affairs, and Waqf (“Ministry”) issued Ministerial Decision 14 of 2021 reinforcing AML requirements for lawyers and legal offices (the “Decision”). The Decision sets out AML and combating financing terrorism (CFT) obligations, covering the illegal cross-border transfer of funds in the legal profession, foreign legal consulting offices, rules for freezing (and lifting freezing of) funds, and prohibiting dealings with persons or entities, including on national terrorism lists.
Specific Obligations
In accordance with the Decision, legal professionals and foreign law firms must fulfill the following requirements:
- Appoint members as a Compliance Officer, Deputy Compliance Officer, or Branch Compliance Officer responsible for implementing the provisions of the relevant AML legislation. Duties include but are not limited to implementing the provisions of the Decision, detecting suspicious transactions or attempting to deal with them, and reporting them to the Follow-Up Unit as soon as they are detected.
- Verify and validate all information clients provide regarding their identity and the identity of the Ultimate Beneficiary Owner (“UBO”). This information should be recorded in the registers maintained by the Ministry. The concept of the UBO refers to any person, whether identified or unidentified, who has direct control or influence over a company/legal entity through financial contributions, assets, or other means, and who benefits from the entity’s business transactions. The aim is to eliminate any potential anonymity.
- Refrain from engaging with anonymous individuals or those who refuse to disclose their identity or the identity of the UBO.
- Freeze any funds and cease all legal work related to individuals or entities listed in the Sanctions List, which includes those blacklisted by the UN Security Council or listed in the Bahrain Terrorist List published by the Ministry of Foreign Affairs.
- Do not disclose to clients any suspicions of their involvement in an offense as defined in the main legislation relating to Money Laundering, Article 2(1) of Law No. 4 of 2001 on the Prevention and Prohibition of Money Laundering (“AML Law”). This obligation is repeated as it is already an offense under Article 2(5) of the AML Law to tip off a person, as it would undermine an investigation. The Decision emphasizes this in relation to the legal profession due to its potential role in facilitating money laundering transactions.
- Maintain a business account with a bank approved by the Central Bank of Bahrain (CBB), to which client funds should be transferred exclusively. The Follow-up Unit must be notified about the existence of this business account by filling out the designated form. Cash payments exceeding One Thousand Bahraini Dinars (1,000 BHD) should not be accepted.
- Establish an electronic database that records client details, subject matters, and transaction numbers for fund transfers.
- The data and documents of the clients must be kept for a period of five years from the date of the end of the legal work or work of a special nature, and it is prohibited to destroy any records related to it if it is under investigation by the competent authorities without the need to refer back to the Follow-up Unit.
- Contract with licensed audit offices to audit professional bank accounts if the income is more than Ten Thousand Bahraini Dinars (10,000 BHD) per year.
- Seek the services of a licensed financial auditor and submit a financial audit report on the firm’s accounts to the Follow-Up Unit within three months after the end of the year.
General Obligations
- Conduct KYC. It is not permissible to deal with unknown individuals or individuals who refrain from providing data concerning their identity or the identity of the ultimate beneficiary or if the documents necessary for implementing normal due diligence and enhanced due diligence are not fulfilled.
- Participate, whenever possible, in training programs related to combating money laundering and terrorist financing.
- Verify the credibility of the data concerning the identity of the client and the UBO and record it in the register approved by the Ministry, the disclosure form, and electronic registers and inform the Follow-up Unit of any suspicious data in addition to updating the data and documents periodically.
Conclusion
These requirements ensure that lawyers and foreign law offices in Bahrain actively contribute to preventing and detecting money laundering, terrorist financing, and illicit fund transfers. The penalties can be administrative or criminal or both. For more information about anti-money laundering, please get in contact with us.
