Sham Litigation: A money laundering Enabler

When we talk about financial crime risk, many generally think of it as being associated with only financial institutions. But nobody, especially the professional services firm, is immune. Criminals are now thinking outside the box to further advance their illegal activities and sham litigation in law firms is one of the emerging methodologies of laundering dirty money. Yes, this method of money laundering might be farfetched in this part of the world but it is happening elsewhere especially, in the United Kingdom. Also, recent judgment debts against the government of Ghana can be manipulated by criminals and constitute sham litigations.

This article is aim at throwing light on how the judicial system might be vulnerable to the activities of criminals and measures can be put in place to reduce the risk.

The MPs in the UK parliament are worried about how “pin-striped enablers” in law firms are assisting Russians in exploiting European courts to launder money out of Russia. There were even allegations that close associates of Russian President, Vladimir Putin, were using the UK judicial system to launder dirty money and settle old scores. According to Dame Margaret Hodge, MP in a report for the King’s College London Policy Institute, published in March 2022, “There are scores of enablers who are willing to advise and support the crooked and the kleptocratic to stash their dirty money in the UK”. These comments came after the Henry Jackson Society published Andrew Foxall report, Russian Kleptocracy and the Rule of Law: How the Kremlin Undermines European Judicial Systems. According to the report, Corrupt Russian oligarchs are suing each other in English courts as a way of laundering hundreds of millions of pounds in dirty money.

One of the ways criminals are using to exploit money laundering loopholes in the judicial system is through false representation, where the criminal approaches the law firm in a “reputable” jurisdiction for representation in a dispute. The criminal accepts the terms and conditions of the law firm and makes an advance payment on account. The criminal gets in touch with the law firm later and says it has unexpectedly resolved the dispute and thus needs a refund. The law firm transfers back the advance payment (minus charges or fees). This gives the criminal a good reason to spend the funds without any suspicion from his or her bankers.

Debt recovery is also another means through which criminals are laundering their ill-gotten funds within the judicial system. The criminal seeks the help of a law firm in a “reputable” jurisdiction in recovering a debt it is finding difficult to collect. After issuing the first and second demand letters, the debtor gets in touch and offers to settle the debts in full. The funds are sent to the law firm by the debtor, which is then forwarded or transferred to the criminal, minus a fee for services). The money now becomes legit to be used. A case in point was a litigation case filed by suspected fuel smuggler Gordon Debono – who faces criminal charges in Italy – to have his Belize company Oil & Ship Consultancy (OSC) pay back a €1.5 million loan from Dubai company International Properties and Investment Ltd (IPIL), whose “board of directors” is represented by Debono’s wife Yvette. ¹

Mention can also be made of judgment debts as one of the ways criminals use to launder their proceeds of crime. This is possible when corrupt individuals orchestrate fake disputes and instruct their lawyers to pursue a claim in court. Alternatively, a corrupt individual could orchestrate a claim between themselves and a company of which they are the (secret) ultimate beneficial owner. In either case, the “claim” is settled or judgment obtained, providing the corrupt individuals with a court order that they can show to their bankers to justify payments being made or received. Dirty money can then be paid out as damages after the judgment which then cleanses their ill-gotten gains.

Government judgment debt could be another means through which criminals are able to launder their proceeds of crime. The criminals fund the political party to win elections with the dirty money. The government pays back the money through a judgment debt after a deliberate sour contractual agreement. The government of the day either deliberately provides a weak defense or opts for a settlement. The judge makes a ruling and the government pays the criminal with clean money, legitimizing the use. I am not saying all the judgment debts against the government are a way of laundering money, but this is a possibility which criminals can be exploit.

Litigation funding also makes the judicial system to be vulnerable to the activities of criminals wanting to wash their ill-gotten funds. This method of laundering money might not be common in this part of the world but it is an avenue for criminals to use their dirty money to fund the litigation process (mostly civil cases) of another person and share in the judgment claims in a percentage agreed upon.

The fight against money laundering can only be won when everyone plays their role well by following these measures. These measures will not eliminate the menace in its entirety but will help reduce its vulnerabilities on individuals, industries (companies), and the economy at large.

Legal firms should institute Know Your Customer (KYC) measures within the firm so as to properly identify their clients, what they do, and even who their customer’s customers are. The law firm should have a client acceptance policy which, will help them in defining which customers to onboard. Appropriate due diligence must not only be conducted at the onboarding stage but during and after the course of representation. In addition to the KYC procedures, names of customers/ clients should be run through the sanction lists provided by OFAC, HRM, UN and EU.

The enactment of the new Anti-Money Laundering Act, 2020 (Act 1044), which it expanded the scope of accountable institutions to include Law Firms, is in the right direction to fight the money laundering menace. But the law can achieve its intended purpose in fighting against money laundering in the judicial and legal system when the Financial Intelligence Center (FIC) issues guidelines as to when, how and what lawyers or law firms need to do. At least the guideline should address the reporting requirement with regards to suspicious activities, currency reporting (what should lawyers or law firms do when they suspect potential sham litigation?), AML compliance program to be instituted.

Law firms should appoint a designated Anti-Money Laundering Reporting Officer (AMLRO), who will be the first port of call when dealing with suspicious activities and make a report to the right authorities after a proper investigation.

Law firms should engage expects to train staff members (including casual workers) on the activities of criminals and how the industry and/ or players could be vulnerable to the activities of money launders.

A careful Risk Assessment of clients and activities will go a long way to mitigate the risk of money laundering associated with the legal practice. Law firms need to assess high-risk areas and activities within the firm and also which services are more vulnerable to money laundering. High-risk services and/or clients should be approved by senior partners and Enhanced Due Diligent (EDD) conducted.

It is clear that law firms and individual lawyers must remain vigilant and comply with their duties to avoid sham litigation and preserve the integrity of the courts, but can they do it all only?

Would you mind doing me a favor? Share this article with someone so that awareness of money laundering could be spread to avoid being used as a conduit by criminals.

If you require further information on this article, please contact Richieson @ [email protected]