Law watchdogs have been given five months to clean up their act after a review found their anti-money laundering procedures to be inadequate.
The Law Society of Scotland has been given until July to better train staff on how to spot potentially dirty transactions and ordered to introduce a "whistleblowers' hotline" to encourage solicitors and the public to report concerns.
Millions of pounds are laundered through Scotland via legitimate law firms every year, with the majority of solicitors unknowingly helping organised crime groups to clean their cash through property sales or by setting up companies on their behalf.
However, experts say reporting even suspicions of malpractice is “woefully low” in the industry, despite lawyers being the most at-risk profession for targeting by criminals.
Lawyers also say the nature of the industry makes it difficult to report problems for fear of being "singled out" or making an incorrect judgement about potential fraud.
The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) conducted a review of the Law Society of Scotland last year but have refused to detail their findings, while the Law Society said the results were “mainly positive”.
The Herald on Sunday understands shortcomings were uncovered, including training among the society’s own staff in how to deal with money laundering, and methods for solicitors and the public to report suspicions.
A deadline of July has been set to deal with the concerns.
A source close to the investigation said: “The report contained recommendations that the law society would be keen to not become public, as there are potential reputational risk issues associated with it.
“If regulators are satisfied that those issues are being addressed, they won’t not reveal publicly what was wrong. Economically it could be very damaging to the firms concerned."
Earlier this month the Law Society set up an online and telephone reporting service to encourage professionals and the public to submit Suspicious Activity Reports (SARs) about financial impropriety as part of the move to address the concerns raised in the review.
They also confirmed all law firms which come under anti money laundering regualtions have completed a certificate, in line with legislation.
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The Law Society insists Scottish solicitors do not have a problem reporting money laundering, and the society itself inspects and reports concerns when they see a problem.
In the last three years they have submitted an average of 11 SARs to the National Crime Agency per year and have inspected around 900 firms in the same period.
Last year, lawyers reported less than 1% of all SARs recorded by the national crime agency, with 2402 reports received from solicitors throughout the UK.
Ian Messer, the Law Society of Scotland’s director of financial compliance said: “We have not put this reporting concerns line in because we think there’s an endemic problem.
“We have put this in because we want to make the right communication channels available if people think they want to report something.
“Over the years, only one solicitor has ever been convicted in the courts of money laundering. It is very small.”
He added: “The nature of Scottish industry makes it more likely that people will report to us. People care about the professional and are likely to raise a matter where something is potentially damaging.”
His colleague Philip Yelland, executive director of regulation, added: “The Government reports show the number of SARs coming from professionals across the UK has gone down a bit.
“It’s not to say the numbers should be higher, but we need to take steps to ensure everyone knows what is required.
“We do quite a lot of that through events, website information and guidance. I would be confident in saying that Scottish solicitors knew they should report suspicious activity.”
Their views were not shared by some Scottish lawyers, who claimed they would be afraid of being blacklisted or referrals would dry up if they reported concerns which were found to be inaccurate. Others say the referral mechanism could be used to make false allegations against rivals.
One lawyer said: “The reporting hotline should encourage us as a profession to self-police but it is also open to other solicitors making malicious allegations with no foundation.
“In my own experience I have never had concerns about anyone that I have worked with. There are certain lawyers I won't do business with but that's mainly down to a personal reason for distrusting them.
“The other thing to remember is that it is rare for a solicitor to get a straight red card. I spent months working with a previous firm as the lawyer was in all sorts of financial difficulties.
“Between the Law Society and the legal aid board they must have given [the lawyer] at least half a dozen chances to get the house in order, including sending people to set up systems to make the office compliant.
“Even when this person was banned from doing criminal legal aid work they were still allowed to apply for civil and children’s legal aid. After around three years they eventually struck them off.”
Graham Barrow, one of the UK’s top money laundering experts, said the under-reporting of potential money laundering is “woeful” across the legal sector.
Last year, the government announced plans to crack down on solicitors and other professions who fail to report suspicions or actively allow money laundering, launching a campaign to encourage professionals to be more aware of illegal practices.
Barrow said: “The regulators have singled out the lack of responsiveness from [solicitors, accountants and other professionals], and the light is going to start shining on them to report more. “It used to be the banks, but the focus is now turning.
“It is the level of reporting [of concerns] from solicitors which is woeful. That is a general problem across the legal profession.
“The problem is both a cultural and educational one. Once you get away from the main urban centres, ignorance is a problem and sadly Scotland has been a hub for money laundering.
“Solicitors will say ‘I know all my clients and I’ve known them for years’.
“That’s fair, but it doesn’t absolve you from your legal duties.
“Solicitors are in a very closed community, a lot of referrals are based on recommendations and word of mouth, and the impact of making a formal Suspicious Activity Report (SAR) is significantly higher if you get it wrong.
“The other thing is, really good money launderers do wangle their way in. That’s how they do it, they win your trust by taking you out for lunch, getting involved with local good causes and that is their modus operandi.
“They present themselves as pillars of the community. I suspect there’s a good few solicitors who work on a personal ethic. We don’t really work in that world any more, sadly.
“The bad people will take advantage of all of those things to try and launder money.”
Mr Barrow said that in Scotland, home-grown organised crime gangs are more likely to be the source of dirty funds than large international groups, however high-value property in Edinburgh and Aberdeen could be used to clean dirty cash from international gangs too.
He explained: “In places such as Glasgow and Edinburgh where organised crime gangs operate at street level, it is likely they will be using proceeds from drugs, trafficking etc to fund property particularly and using commercial structures as part of that laundering process.
“The ultimate destination for international money laundering could end up in high-end property such as in Edinburgh or Aberdeen, but it is more likely to be domestic organised crime groups targeting solicitors or working with them.”
For many solicitors, he said, the problem can come from finding out where their client has got the cash to buy property or set up a company in the first place.
Mr Barrow said: “The weakest point for most solicitors is establishing the source of their clients’ wealth.
“In places where property has becoming pretty valuable, for example Edinburgh and Aberdeen, there is exposure [for laundering] there for solicitors who are accepting funds for purchases if they do not do their proper due diligence.”
A Law Society of Scotland spokeswoman said: “We take our responsibilities as an anti-money laundering regulator extremely seriously and are pleased to have been highlighted for our good practice by the UK Government.
“We have created a specific anti-money laundering team and recruited three specialists within the past three years with extensive skills and knowledge. This means our skillset is now amongst the highest level.”
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