Caught Between a Rock and a Hard place

An action was raised against Lehman, Lee & Xu a Chinese law firm and others by TAGC Management LLC and Total Access Global LLC of the firm, claiming fraud and breach of fiduciary duty.

Anyone may sue anyone at any time, for any reason. In this case, TAGC Management LLC and Total Access Global LLC were never clients of Lehman, Lee & Xu. These companies appear to have been formed after the fact for the purpose of bringing this frivolous law suit. The Lehman, Lee & Xu law firm based in Beijing was never sued.

The lawsuit, allege that in June 2010 the Defendants induced the Plaintiffs and their investors to deposit approximately $1.2 million into an escrow account with the defendant on the basis that Lehman, Lee & Xu would provide the Plaintiffs with professional services to start a credit card company. The Plaintiffs claim that after putting money in an escrow account, they suddenly lost confidence in the Defendants. Then the Plaintiffs requested that their money be returned.

This case shows how lawyers who feel they’re at risk of facilitating money laundering may incur liabilities in countries far away because of divergent approached to the problem. In this context, divergent national approaches to regulation can hinder an effective AML preventive effort.

The Defendants were of the opinion that the Plaintiffs were trying to launder money. WEX by Cornell University describes money laundering as follows:

Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. The money laundering process can be broken down into three stages. First, the illegal activity that garners the money places it in the launderer’s hands. Second, the launderer passes the money through a complex scheme of transactions to obscure who initially received the money from the criminal enterprise. Third, the scheme returns the money to the launderer in an obscure and indirect way.

It is possible to go through the three stages of money laundering by instructing a lawyer, paying them to fulfil a purpose and then withdrawing instructions. This is what the law firm thought.

Lawyers are at a particular risk of unwillingly facilitating money laundering because of their involvement with client funds. Cross border transactions present a particular difficulty for lawyers as the laws in various jurisdictions may conflict with regards to reporting procedures, substantive laws and client confidentiality. Additionally, if checks are done, the lawyers may be unfamiliar with the systems in the foreign country, which would prevent effective client due diligence from taking place.

FATF have described how clients have used lawyers to launder money. Here is one example:

In one member country, one of the laundering techniques used is to deposit cash in solicitors’ client accounts, in several amounts under about US$ 6 700, and then use the total credit balance for a real estate investment. In another member, a recent enquiry revealed how a lawyer could use a client account to launder the proceeds from a credit fraud offence. The funds were paid into the lawyer’s client account, then converted by him into cheques drawn on a bank of another country which were subsequently cashed by a correspondent designated by the lawyer concerned.

So what should a lawyer do when they think a client is trying to launder money through their firm? The simple answer is not to do anything to begin with apart from investigating matters. Additionally, there may be an obligation to provide a report to the local law enforcement authorities.

So what should the Defendant have done? It is understandable how they may have viewed the client transactions as suspicious, so perhaps in the circumstances they did the right thing.

This particular case highlight the need for governmental cooperation in the field of anti-money laundering so that an international standard can be achieved that will not leave a business compliant in one country, but in violation in others. The EU, USA and China will be pivotal in achieving a harmonised approached around the world.

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