On Wednesday the High Court heard an appeal between the Solicitors Regulation Authority (SRA) and Dentons UK and Middle East LLP (Dentons) which raises fundamental questions about how lawyers are held to account for compliance with their anti-money laundering (AML) obligations.
The stakes are high on both sides: the UK’s largest legal sector regulator needs a win to demonstrate its effectiveness as an AML supervisor, while the largest global law firm looks to stave off the reputational damage of a finding that its AML failures amount to professional misconduct.
But in bringing this appeal, the SRA has left itself with a very slim route to success in a case that has wide-reaching implications for the UK’s fight against dirty money.
The missed opportunity: why leave the Tribunal’s troubling findings unchallenged?
The appeal challenges a ruling by the Solicitors Disciplinary Tribunal (the Tribunal) that cleared Dentons of professional misconduct despite finding that the firm had breached the Money Laundering Regulations 2007 (MLRs).
The firm had failed to do adequate AML checks on the source of funds and source of wealth when acting for the chairman of a state-owned bank from a kleptocratic regime who was buying up high-end London properties. Yet the Tribunal reached the baffling conclusion that this breach of the MLRs was not serious enough to amount to a breach of the SRA’s professional rules requiring solicitors and firms to “comply with legislation” (Principle 7 of the SRA Principles 2011), and “anti-money laundering legislation” more specifically (Outcome 7.5 of the SRA Code of Conduct).
The Tribunal’s 94-page judgment provides an exhaustive recital of the parties’ arguments on the issues, but its own “findings” on the allegations are set out in under four pages. While brevity can be a virtue, the Tribunal’s conclusions are barely reasoned – often simply adopting a position rather than grappling with competing arguments.
There is plenty to unpick in the Tribunal’s treatment of the core issues in the case, and the many gaps and anomalies the decision leaves for the UK’s AML regime. Yet instead of tackling these troubling findings head-on, the SRA has opted not to challenge any of the factual or evaluative findings made by the Tribunal.
Of course there is a high bar to overturning the findings of a specialist tribunal but, faced with such a thinly reasoned judgment and its damaging consequences for the AML regime, it is difficult to understand why the SRA has left key missteps by the Tribunal unchallenged.
The narrow question: do AML breaches always amount to professional misconduct?
With all the factual and evaluative findings of the Tribunal left untouched, the SRA’s grounds of appeal are limited to raising a very narrow question of law: is there an additional or threshold requirement of seriousness for a breach of the MLRs to amount to “professional misconduct”?
The answer to this narrow legal question largely turns on the interpretation of two judgments of the Divisional Court – Solicitors Regulation Authority v Day (Leigh Day) and Beckwith v Solicitors Regulation Authority. Somewhat ironically, both the SRA and Dentons say there is no conflict between these decisions, but in true lawyerly fashion their counsel each claim them as supporting their own position.
The Tribunal adopted the interpretation advanced by Dentons, relying on Leigh Day, that the breach of a rule will ordinarily only amount to professional misconduct if it is “sufficiently serious, reprehensible and culpable”. The firm pointed out that the SRA’s own guidance makes clear that it will only enforce “serious” breaches of the MLRs. On the Tribunal’s evaluation of the facts, the firm’s breach of the MLRs was “not serious” and “entirely inadvertent and thus fell within the small category of cases where wrongdoing did not amount to professional misconduct”.
The SRA accepts that there is a seriousness threshold for determining breaches of some professional rules, such as maintaining public trust in the profession (Principle 6 of the SRA Principles 2011). The regulator argues, however, that there is no such additional or threshold requirement where seriousness is “baked into” the prior question of whether there was a breach of the regulatory requirements. On this approach, the question of whether a solicitor or firm is guilty of professional misconduct for AML failures is a binary question: either they complied with the MLRs or they did not.
This leaves the SRA in a somewhat paradoxical position: without challenging the Tribunal’s evaluative finding that the AML failures were “not serious”, the SRA seeks to persuade the court that all AML breaches are inherently serious and so automatically amount to a breach of the professional rules. Similarly, the SRA does not challenge the Tribunal’s finding that the AML breaches were “inadvertent”, but argues that there is no additional requirement to show culpability.
The missed perspective: why is this case important for the UK’s fight against dirty money?
The SRA’s narrow grounds of appeal closed off the opportunity to tackle head-on the root problems with the Tribunal’s decision and advance what could have been powerful arguments about its implications for enforcing compliance with the AML regime.
While the risk-based approach to AML compliance means that lawyers exercise their professional judgment on a fact-specific basis, the Tribunal clearly – and on this point rightly – found that Dentons fell short of what was adequate in the circumstances. But the plain error by the Tribunal was that, having found these inadequacies, it completely failed to appreciate their seriousness.
These were not mere technical breaches but fundamental failures to conduct what is arguably the most important part of the due diligence process in high-risk property transactions. Checks on the source of funds and source of wealth are absolutely critical for mitigating the risks of money laundering in property transactions – an area consistently highlighted as being the main vulnerability in the legal sector. Far from aiding efforts to raise the standards of compliance in this area, the Tribunal’s judgment shows disappointing disregard for their importance.
The implications of the Tribunal’s finding only adds to the damage. By dismissing Dentons’ AML failures as insufficiently serious to constitute professional misconduct, breaches of the MLRs have been left unsanctioned. In a context of increased concern about professional enablers who – wittingly or unwittingly – provide the services that allow dirty money to flow into the UK, the outcome of this case sends a dangerous message of impunity.
