Cayman Islands: Reporting Obligations & Tipping Off: Has The Pendulum Swung Too Far?

Last Updated: 13 December 2002
Article by Anthony Akiwumi
Reporting Obligations & Tipping Off: Has The Pendulum Swung Too Far?

The reporting obligation underpinning the regulatory rampart raised in the global battle against money laundering and cross border fraud has come under recent scrutiny in the United Kingdom and in Canada. Contrasting approaches and decisions from these jurisdictions, should give practitioners in these Islands plenty of food for thought. In the rush to legislate against what is properly perceived as a destabilising threat to the proper functioning of governments and their economies, long protected and essential democratic principles namely, the necessity of an independent legal profession and of the sanctity of legal professional privilege, appear to have been sacrificed on the altar of expediency. Perhaps, in the wake of developments, particularly in Canada, the time has come for a reappraisal by the legal profession of the legislative straightjacket imposed by the Proceeds of Criminal Conduct Law (2001 Revision) and the Money Laundering Regulations imposed thereunder.

The fate of the English solicitor named John Duff is a salutary tale of the attendant dangers to legal practitioners in this legislative minefield. The case brings into to stark relief the conflict of interest between one’s duty to one’s client under the orthodox conception of the lawyer client relationship, and the duty foisted upon legal practitioners under proceeds of crime/anti money laundering legislation. Are lawyers, erstwhile independent and fearless defenders of their clients’ interests now no more than toothless poodles subject to the beck, call and sanction of a faceless State?

If it be thought that this question is of purely academic interest to be debated at the various in vogue compliance / anti money laundering seminars, couched in glib exhortations to lawyers to "know the client," then spare a thought for poor old Mr Duff as he serves his six months term of imprisonment at one of Her Majesty’s institutions with the certain prospect of being removed from the Rolls. Consideration of his case should raise the alarm bells for all in the legal profession and should send a shiver down our collective spines. The case was reported in the Legal Section of The Times of 23rd July 2002, which gave the following brief account:

"For failing to report his suspicion in relation to money paid to his firm by a commercial client who was then convicted of drug trafficking, Duff was sentenced at Manchester Crown Court on 1st July 2002, the English equivalent of the Grand Court, to six months' imprisonment. It must be likely that he will in turn also face severe professional sanctions. In essence Duff's involvement arose during the mid- 1990s, when he was paid £70,000 by an established client on account of fees. A little later the client asked for his money back and Duff duly obliged, having deducted a portion for his fees. About a year later this client was arrested in possession of large quantity of cocaine and prosecuted for trafficking. The client pleaded ignorance and instructed Duff to defend him on this basis. Acting for the client enabled access by Duff to the prosecution evidence, from which he ascertained that the client has spent the returned £70,000 on purchases of various items connected with his ostensible business.

However, presumably as a precaution, Duff consulted the statute concerned with reporting suspicion and also took independent advice on the matter. As the relevant statute (S52 Drug Trafficking Act 1994) refers only to suspicion of a person who is engaged in drug money-laundering, Duff decided that he had no such suspicion. At most this related to a past-completed transaction and as his client was currently a prison inmate awaiting trial he could not possibly be so engaged.

So, fatefully, he decided to do nothing. Unfortunately, but understandably, Duff misunderstood his duty under Section 52. The cause of his professional ruin was not an intention to flout the law but a misunderstanding of it based upon ambiguous wording. Nonetheless despite accepting that this was a genuine mistake of law, the judge sent Duff to prison. In sentencing, the judge spoke of the need to send out a clear message to solicitors."

Notwithstanding the deterrent nature of the sentence imposed by the trial judge, there are important issues of principle here that should not lightly be abrogated nor ignored. Are lawyers really expected to act as policemen as well as being defenders their clients’ interests and protectors of the clients’ constitutionally guaranteed democratic rights? Of course, in the United Kingdom and for that matter the Cayman Islands, steeped in the tradition of parliamentary supremacy, Human Rights Acts and Conventions notwithstanding, it is apparently easier for Parliament or the Legislative Assembly to extinguish these constitutional safeguards without much effective protest. The position in Canada, with its Charter of Rights acting as the bedrock of its democracy, is mercifully different and may provide some hope of a reversal of these constitutional erosions. The gauntlet has been well and truly thrown down by the Law Society of Canada, which recently challenged the constitutionality of the reporting obligations imposed by the Canadian proceeds of crime legislation, to all intents and purposes a mirror the English and Caymanian models.

Foreshadowing this challenge was a remarkably robust communiqué issued on behalf of the Law Federations of Canada by Richard C. Gibbs Q.C. in his capacity as chairman of the Special Litigation Committee:

The Government's vision of the role of lawyers as State conscripts to secretly inform on their clients is completely repugnant to centuries of legal tradition and modern views of democracy: the legal profession is founded upon independence of the lawyer from the State, loyalty of the lawyer to the client, avoidance of conflicts of interest between the lawyer and the client, and the keeping of client confidences. Asking lawyers to report to the State on their clients is unacceptable to the Law Societies. All of these core values, along with the solicitor and client communication privilege, are recognized as pillars to our democracy. To protect the solicitor and client communication privilege while riding roughshod over the other core values of the legal profession is a completely unacceptable political response to increase State surveillance of transactions conducted for clients by lawyers. The Government has drawn the line as it sees fit and "consultation" with it has proved fruitless.

By unanimous resolution of all the Societies regulating the legal professions in Canada, the Special Litigation Committee of the Federation of Law Societies has been charged with asserting before the Court the traditional constitutional position of an independent legal profession in Canada unfettered in delivering loyal and confidential legal service to its clients. The FLSC Special Litigation Committee gratefully accepts the challenge of seeing that the Judiciary draws an appropriate line between lawyer State cooption and lawyer independence."

Stirring stuff indeed and lest it be thought that the judiciary, in the face of this hyperbole, would shirk its duty and adopt "a purposive construction" of the Canadian statute, the Law Societies in the various Canadian Provinces have been able to obtain injunctions preventing the extension of the reporting and tipping off aspects of the proceeds of crime legislation to the legal profession. At first blush, it might be tempting to conclude that the injunctions were premised exclusively on the explicit safeguards guaranteed by the Canadian Charter of Rights. However, it is significant to note, that in all the judgments granting interlocutory relief, the judiciary recognized the principle of an independent bar as an essential unwritten rule of the constitution and a core democratic principle.

In the LAW SOCIETY OF BRITISH COLUMBIA, CANADIAN BAR ASSOCIATION (as INTERVENOR) v ATTORNEY GENRAL OF CANADA 20th November 2001, the question before the Court was whether the impugned legislation had the effect of placing all lawyers in a profound conflict of interest between their duty of solicitor-client confidentiality owed to a client and their duty to report that client to the government. In considering the principles at stake, Allan J concluded that issues of (a) whether the independence of the bar is a constitutionally protected right and, if so, (b) whether the impugned legislation violates that right, raise serious constitutional questions to be tried. In the course of her judgment, ALLAN J agreed with the following propositions:

    1. An independent bar is a cornerstone of a democratic society and that the bar must be free from government regulation;
    2. An independent bar performs a critical role in the proper administration of justice;
    3. Solicitor – client confidentiality is a principle of fundamental justice;
    4. The protection of the independence of the judiciary is an unwritten principle of the Constitution.
    5. There is an interdependent relationship between an independent bar and an independent judiciary which requires that the former as well as the latter should be considered unwritten constitutional norms;
    6. An independent bar is essential to the maintenance of an independent judiciary. Just as the independence of the courts is beyond question so the independence of the bar must be beyond question. The lawyers of the independent bar have been the constant source of the judges who comprise the independent judiciary in English common law history. The "habit" of independence is nurtured by the bar. An independent judiciary without an independent bar would be akin to having a frame without a picture.
    7. In the performance of what may be called his private function, that is, in advising on legal matters and in representing clients before the courts and other tribunals, the lawyer is accorded great powers not permitted to other professionals.... By any standard, these powers and duties are vital to the maintenance of order in our society and the due administration of the law in the interest of the whole community.

Interestingly, in granting the injunction, the Learned Judge was unpersuaded by the Attorney General’s submissions on the necessity of the impugned legislation to as a means to give effect to Canada’s international commitments given to the FATF to co-operate in efforts to eliminate money laundering from the proceeds of crime. Furthermore, the Learned Judge was unimpressed with the argument that because other countries had enacted comparable legislation requiring lawyers to report "suspicious transactions", that the same should be extended to Canada. Indeed, on an examination of the legislation in the United States, she found no counterpart to the provision in its law and, on the basis of expert evidence doubted whether the US courts would regard such a provision as constitutional.

The Learned Judge also made reference to the European Parliament’s approval of a Directive in November 2001 amending an earlier 1991 Directive "on the prevention of the use of the financial system for the purpose of money laundering." The Directive, to be adopted shortly will be binding on all member states of the European Union. It is significant that an explanatory memorandum to the draft Directive notes that lawyers would be exempted from any suspicious transaction identification or reporting requirements connected with the representation or defence of a client in legal proceedings, and "again to make full allowance for the professional duty of discretion, as called for by the European Parliament," member states would have the option of allowing lawyers to communicate their suspicions of money laundering to their bar association or equivalent professional body. Thus, legal advice remains subject to the obligation of professional secrecy unless the lawyer is taking part in money laundering activities, the legal advice is provided for money laundering purposes, or the lawyer knows that the client is seeking legal advice for money laundering purposes. It is worth noting that in the ensuing debate on these issues, the presidents of the bars of Germany, Switzerland, Austrian and the Netherlands in a joint statement declared:

"Not even totalitarian dictators have asked law firms to do this. A citizen’s right to absolute confidentiality from his or her law firm is a basic fundamental legal right."

As previously stated, the Courts of all the other Canadian Provinces following a co-coordinated attack by the Law Societies and the Canadian Bar Association adopted this decision. In the wake of this judicial unity, the Attorney General of Canada was compelled in May of 2002 to reach an agreement with the Federation of Law Societies of Canada the effect of which is to exempt legal practitioners from the reporting obligations as previously described until the issue has been determined by the British Columbia Supreme Court and beyond. The impugned provisions were brought into effect on 12th June 2002 and until the determination of the appeal have no effect on the legal profession, including notaries.

From the Cayman perspective it is instructive to note how the judicious use of fundamental basic principles can be used as an effective safeguard against the threatened over-enthusiastic foreign inspired interferences of the Legislative and the Executive branches of Government. Brought to its most basic level, is the difference in duty owed to the alleged confessed criminal and the money launderer justified in principle? Is the money launderer entitled to expect less confidentiality in his dealings with his attorney than a person accused of a serious offence against property or person? On any analysis, there can be no justification for this inequality of treatment and it is this that undermines the basic premise of the reporting obligations imposed by our anti money laundering legislation. In any event, if the Canadian and European experience is any guide, the time has perhaps come for a reversal in the swing of the pendulum. Perhaps a "back to basic principles" approach will have to be adopted by the legal profession as a whole. These principles, often ignored in the cut and thrust of arcane negotiations between the Executive and the legal profession, are the keys to the tried and tested mechanisms that prevent the preemptory abrogation of long established constitutional common law rights. Society as a whole will be better served by this re-affirmation to the basic canons of our democracy. For Cayman though, and we hope not, it may well be that an invocation of these principles may be too little too late.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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