Dirty laundry: are the English courts washing dirty money?

“Pin-striped enablers.” A new synonym for lawyers according to Andrew Foxall and his report, Russian Kleptocracy and the Rule of Law: How the Kremlin Undermines European Judicial Systems, recently published by The Henry Jackson Society. The report outlines a new study on how corrupt Russian oligarchs and officials have exploited different European justice systems for their own political or economic gain. In the case of the UK, Foxall asserts that “Russian oligarchs may have used English courts to launder tens, possibly hundreds, of millions of pounds through various scams,” allegedly aided by law firms failing to comply with their duties and becoming either knowingly (or unknowingly) embroiled in sham litigation.

The suggestion is that sham litigation can be conducted in one of two ways. First, corrupt individuals orchestrate a fake dispute and instruct lawyers to pursue a claim in the English 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 which they can show to banks and others to justify payments being made.

Foxall further suggests it is “questionable whether [legal professionals] are taking their obligations as seriously as they might”. But is this a fair characterisation?

The High Court has for many years hosted a range of Russian litigation (The Portland Commercial Courts Report 2019 cites that Russia is the fourth most popular litigant nationality). Litigators involved in Russian disputes will say that they are among some of the most bitterly fought cases.

Media coverage surrounding this report alludes to the notion that sham litigation has been a prominent concern for the English courts for years. The issue is even described as a “critical national security threat.” Yet, if this were so, where is the empirical data to authenticate these claims? There are currently no statistics, nor any estimate (reliable or otherwise), into the number of supposedly fictitious cases fought through the English courts. Claims in the English courts are public, with documents available to anyone. Would corrupt individuals expose themselves to the risk of public scrutiny in that way?

There have been complaints that solicitors are not making enough suspicious activity reports, particularly when compared to banks. Last year, 2,441 reports were made by law firms, accounting for only 0.5% of the 2018-19 yearly total. There are about 850 claims issued each year in the Commercial Court. Even if a high proportion of those claims gave rise to reportable suspicions which are not currently being reported, there will not be a significant increase in the number of suspicious activity reports. Query whether, if there is a problem of under-reporting from solicitors, it is caused by insufficient reports from litigators.

Aside from the appropriate due diligence at the outset of the matter, and remaining vigilant during the course of a claim, what should lawyers do if they are concerned that they are caught up in potential sham litigation?

The first question is whether the lawyer considers whether they are able to continue acting in the litigation in light of their professional obligations and duties to the court.

The second issue to consider is whether it is necessary to make a money laundering report in respect of any transaction in which the the law firm is involved (which may include the payment of the law firm’s fees).

Each firm should have a designated money laundering reporting officer (MLRO), who is the first port of call when dealing with suspect activities. The MLRO must then make a suspicious activity report if they either know or suspect that money laundering is underway. The threshold of suspicion is derived from R v Da Silva, where “a vague feeling of unease would not suffice”. Instead there must be a possibility, which is not merely fanciful, that the act is taking place. For example, just because another practitioner informs the MLRO of their suspicions concerning a client, the MLRO is not automatically required to have the same suspicion. Shah v HSBC states that the MLRO should form their own view by reviewing the relevant information and asking related questions.

In October 2019, the Solicitors Regulation Authority revealed that a fifth of the law firms in England and Wales were failing to adhere adequately to the money laundering obligations required of them. 172 investigations linked to money laundering were opened in 2019, and, in the last five years, 40 solicitors have been struck off for related offences. However, there is no data on how many of these issues were linked to litigation in the English courts.

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 English courts, but is there really sufficient evidence, on this narrow issue, to justify the call in the report for Parliament to launch an “inquiry into Russia and the international legal system”?

Jason Woodland, Partner at Peters & Peters Solicitors LLP, is a committee member of the London Solicitors Litigation Association (LSLA). With thanks to Amalia Neenan, Legal Researcher at Peters & Peters Solicitors LLP, for her contribution to this blog.

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