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English firms warned on ‘sham litigation’ risks

Law firms in England and Wales have been warned about the dangers of falling prey to clients engaging in sham litigation to launder money, according to the Law Society Gazette of England and Wales.

In guidance published this week, the Solicitors Regulation Authority (SRA) said that litigation firms were at particular risk, as they were involved in high-value transactions where the true ownership of assets could be obscured.

In such schemes, criminals and their associates might orchestrate fake disputes and instruct lawyers to pursue a claim in the courts: the resulting judgment or settlement agreement then serves as a front to the transfer of illicit funds or assets.

Litigation ‘a front’

According to the Gazette, the regulator did not indicate that there had been a particular spike in sham litigation.

It cited, however, the case of client Narinder Kaur, who used several firms in purported litigation with her brother. In fact, she was using this as a front to hide funds in a variety of client accounts.

Kaur was ultimately convicted on multiple counts of fraud and jailed for ten years.

Red flags

Calling on law firms to be vigilant, the SRA pointed out that litigation did not come within the scope of the MLR 2017 – rules that set out the additional obligations of private-sector firms working in areas of higher money-laundering risk.

The regulator said that this made litigation attractive to money-launderers.

“Law firms, however, are still within scope of the Proceeds of Crime Act and should be capable of identifying red flags, as well as investigating the circumstances further to prevent their services from being misused in sham litigation,” the SRA stated.