A recent case provides a useful reminder of the importance of safeguarding confidential information unless, in accordance with Outcome 4.1 in the Code of Conduct, the client consents to disclosure or there is a clear legal duty to reveal the information.
Schedule 23 of the Finance Act 2011 provides HMRC with the powers to demand certain information termed “relevant data”, and it seems to have been making increasing use of this provision to demand details from law firms on the tax affairs of their clients. The HMRC’s contention was that the status of a law firm undertaking regulated activities under the Money Laundering Regulations (“MLR”) would make them a “relevant data-holder” under the act, and so oblige them to provide the requested information.
Although a number of firms had apparently complied with these requests, Salisbury firm Wilsons challenged the demand and were duly vindicated for having done so. It was held that the Money Laundering Regulations did not make them a “data holder” for these purposes, nor was the information demanded by the notice to be regarded as being “relevant data”.
It was also reported that HMRC had sought to censure Wilsons for not complying promptly with the demand, on which point Judge Barbara Mosedale commented that it was entirely appropriate for the firm to have taken the action that it did and that it was the firm’s “right, and probably their duty to their clients” to test the Revenue’s assertion that the provisions applied in circumstances where this was in fact unclear.
In financial crime investigations, and cases of suspected money laundering activity in particular, the standard response should usually be to request a production order if sight of a file is demanded, and to refuse to make it available otherwise. Even then, privileged information should be withheld from disclosure and it would be a failure of the firm’s duties to its clients not to do so. As to what constitutes privileged information on non-contentious files, including conveyancing matters, the most important items will be confidential correspondence between the lawyer and the client and bills of costs or statements of account. For further information on this it is worth consulting the Law Society’s recently re-issued practice note “Responding to a Financial Crime Investigation” (24 th September 2018). A ploy that has sometimes been used in police investigations has also been to threaten proceedings under s.342 of the Proceeds of Crime Act 2002 (“POCA”) to the effect that the firm is “prejudicing an investigation” by demanding a production order. If encountered this approach should be rebuffed.
There is no current guidance from the SRA on the other circumstances when the duty of confidentiality may be waived, but the legal duty to disclose a knowledge or suspicion of money laundering activity under POCA is the most obvious example. In addition, a guidance note to the former 2007 Code of Conduct also suggested that situations where it would be permissible to disclose confidential information where neither consent or legal obligation apply would include the prevention of a criminal act by the client or another that is likely to result in “serious bodily harm”, and other instances to prevent continuing abuse to children.
Finally, on this point, all of the above might be particularly relevant to Lexcel firms if they are updating to the latest version of the standard – 6.1 – as there is now a requirement at 5.13.g for “a system for responding rapidly to AML enquiries from the authorities”. The Wilsons case shows that this response should not necessarily be to simply comply with the demand.