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LAWYERS AND MONEY LAUNDERING OBLIGATIONS

The increasing burden levied by national money laundering regulations on lawyers, notaries and other professionals is becoming a great concern to the extent that such duties may heavily impact on other material duty such as professional secrecy and privileged attorney/client communications.

The Spanish rules on money laundering, insofar as they impose on the lawyer the duty to notify the Executive Service of the Commission for the Prevention of Money Laundering (better known by its acronym SEPBLAC in Spanish) of certain operations of its clients, intends to be an exception to the duty of professional secrecy established in article 542.3 of the Organic Law of the Judiciary, article 32 of the General Statute of Lawyers and article 5 of the Code of Ethics of Spanish Lawyers.

The interpretation that, in principle and according to the General Advocacy Council, seems to stem from Article 22 of Law 10/2010, is as follows:

a.- In those cases in which the lawyer's action is limited to analyzing the legal position of the client, defending him in legal proceedings or advising him on initiating or avoiding a process, the duty to maintain professional secrecy prevails.

b.- When the lawyer is asked to actively intervene in any of the manners or transactions foreseen in the regulations (devising of transactions, money management, creation of companies...) the duty of professional secrecy is superseded by the obligations set forth in Money Laundering Regulations, providing that in the event the lawyer comes to know or believes that a deal, transaction or actions may involve money laundering activities must communicate the relevant transaction to the Executive Service of Prevention of Money Laundering (SEPBLAC), in the terms and manners  described therein.

There is a diffuse area in relation to advice - one of the lawyer's main tasks - which doubts can be solved on the basis of identifying the moment when the lawyer comes to know the relevant facts. If the advice is subsequent to the execution of any of the activities foreseen by the law, professional secrecy shall prevail. Conversely, if knowledge is prior to the advice, the money laundering rules shall prevail.

This is the interpretation given by the National Advocacy Council when applying article 22 of Law 10/2010, that includes a “circular” concept by providing that

“Without prejudice to the provisions of this Law, lawyers shall maintain the duty of professional secrecy in accordance with the legislation in force."

Even if the above would seem clear and easy to apply, the truth is that reality does not always provide such clear cut scenarios. In “grey” cases, it is recommended that the matter be referred to the opinion of the Dean of the relevant Bar Association, in the general terms set out in Article 5.8 of the Code of Ethics of the Spanish Advocacy Council.

The obligations referred to above can be divided in the following two broad categories:

(1) Due diligence obligations.

These are normally prior to the lawyer accepting the engagement and can be divided as follows

a) Regular Obligations:

a.1.- Formal identification:  Those who practice law must identify their clients (either individuals or legal entities) with whom they intend to establish business relations or are asked to intervene in specific operations). The law expressly establishes that in no case shall the lawyer maintain business relations or carry out operations with clients who have not been duly identified in advance, (i.e. before accepting the professional assignment), through the presentation of "reliable supporting documents". In the absence of a regulatory development of Law 10/2010, reliable documents should be understood as those provided for in Article 3 of Royal Decree 925/1995. That is,

"Legal persons must present reliable documents witnessing their names, legal form, domicile and corporate purpose, without prejudice to the obligation to communicate the tax identification number (NIF). Likewise, the powers of the persons acting on their behalf must be proved".

This first level already presents serious problems for the professional. Namely, with regard to the possibility of attracting new foreign clients who, even in situations that can be described as normal, are not always fully prepared or able to provide such information. With the law in hand, lawyers should (i) refrain from accepting professional engagements from such clients, with the economic and professional damage that this entails; and (iii) inform SEPBLAC of the situation.

This in itself is difficult to accept/understand, given the fact that the professional's judgement or the fact that the source of the client's reference (e.g. foreign firms) indicate that the client is reliable and/or the result of many years of previous relationship.

a.2.- Identification of the beneficial (real) owner: Lawyers are also bound to determine if the client is acting in its own name and behalf or otherwise on behalf of third parties, in which case the “real owner” (beneficial owner), that is, the person on whose behalf the client it is acting must be identified. The Lawyer is obliged to identify the beneficial owner prior to accepting the engagement (either the establishment of business relations or the intervention in given transactions). In the case of legal persons (legal entities), the real ownership must always be established. To these effects, real owners are construed to be “the natural persons (individuals) who ultimately control more than 25% of the capital or voting rights or who exercise direct or indirect control over the management of the legal person”. In those cases in which it is not possible to identify the real owner(s) of the invested funds, the Lawyer must refrain from acting.

a.3.-     Purpose and nature of the business relationship

Customers should be required to provide (and the lawyer must obtain) information on the purpose and intended nature of the business relationship. In particular, information will have to be collected in order to identify the nature of their professional or business activity, and to take steps aimed at reasonably verifying the truthfulness of such information by implementing procedures allowing to verify the correctness of the information declared by clients, according to the level of risk.

a.4.- Continuous monitoring of the business relationship

Lawyers must provide for ongoing monitoring of the business relationship to ensure that checks match at all times their knowledge of the client, its business and risk profile, including the source of funds committed to the project, and to ensure that documents, data and information available are up to date. This obligation only applies to cases where the Lawyer maintains a permanent and stable relationship with the client, being responsible for all or most of his affairs and receives from him a periodic compensation; normally by way of a retainer.

b) Simplified Obligations:

Practicing lawyers are relieved from the above obligations with respect to the following clients:

a) Entities governed by public law in the Member States of the European Union or equivalent third countries.

b) Financial institutions domiciled in the European Union (or equivalent third countries) that are subject to supervision to ensure compliance with due diligence measures.

(c) Listed companies whose securities are quoted on a regulated market in the European Union or equivalent third countries. (Not all stock exchanges worldwide qualify)

Simplified due diligence measures cannot be applied in the case of third countries which do not qualify as equivalent or in respect of which the European Commission adopts specific decisions.

This would apply to potential clients from non EU countries in general.

The Ministry for Economic Affairs and Finance may exclude the application of simplified due diligence measures in respect of certain customers.

The application of simplified due diligence measures in respect of other customers carrying a low risk of money laundering or terrorist financing may be authorized by subsequent regulation.

b)        Internal Obligations

Further to all of the above obligations, Law 10/2010 also mandates that lawyers must comply with a series of obligations relating to the internal control of law firms, namely:

*          Preparation of an internal manual:  Law firms must establish and implement internal Money Laundering Policies and Procedures (MLPs) to ensure compliance with the money laundering regulations, which policies must be included in the relevant internal manual. The definition of these policies must be preceded by a risk analysis tailored to the characteristics of the law firm in question and must take into account criteria such as the type of clients, their nationality, the specific advice provided, the firm’s organizational structure, number of employees, etc.

*          Internal control body: Law firms must put in place an internal control body responsible for the execution and supervision of the firm's MLPs. This body will be responsible for ensuring that prevention control systems are adequate and up to date.

*          Appointment of a Representative before SEPBLAC:  Law firms must also appoint a representative before the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences ("SEPBLAC") of the Bank of Spain and, where appropriate, up to two authorized representatives who will act under its direction and responsibility.

*          Training of the firm's employees so that they become familiar with the internal MLPs (art. 29 of the Law and art. 39 of the Regulation).

*          Periodic review of internal policies: internal MLP’s must be scrutinized twice a year: First, an annual review must be carried out by an external expert and Second by implementing internal periodical MLP’s reviews.

If (i) the annual turnover of the firm exceeds 50 million euros; or (ii) the annual balance sheet exceeds 43 million euros, there must also exist a technical unit for the processing and analysis of information (arts. 26.2 of the Law and 35.3 of the Regulations).

If the firm has more than 10,000 transactions per year, automated models for generating and prioritizing internal control alerts must be implemented (art. 23 of the Regulations).

Finally, there is a specific exemption for litigation lawyers, setting forth that

"Lawyers shall not be subject to the obligations set out in Articles 7.3, 18 and 21 with respect to information they receive from or obtain about one of their clients when determining the legal position in favor of their client or performing their task of defending that client in or in relation to legal proceedings, including advice on instituting or avoiding legal proceedings, irrespective of whether they have received or obtained such information before, during or after such proceedings”. /////