The limits of privilege

The October Journal included three contributions dealing separately with three closely-linked topics. These were: Catriona Munro's article (p54) on the recent reaffirmation by the European Court of Justice (in Case C-550/07 Akzo Nobel) of its long-established case law on legal professional privilege, an article from the Serious and Organised Crime Agency (p30) on suspicious activity reports, and the editorial (p5) about the passing into law of the Legal Services (Scotland) Bill/Act.

The duty of a provider of legal services to make a suspicious activity report, and the "privilege exception" to that duty, are set out in the Proceeds of Crime Act 2002, s 330, and the Terrorism Act 2000, s 21A, as amended and supplemented especially by the Terrorism Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations 2007 (SI 2007/3398).

This legislation is the United Kingdom implementation of article 22 of the Third Money Laundering Directive (2005/60/EC). This is the source of the reporting obligation that extends to "persons covered by the Directive", including the financial services industry, as well as "independent legal professionals" engaged in transactional work. The "privilege" provisions utilise the derogation allowed by article 23(2) for "independent legal professionals" and certain other kinds of professionals (in the UK legislation: "relevant professional advisers").

The Acts constitute the UK's lex specialis on reporting obligations and the legal professional privilege exception. As they implement an EU obligation, they must (irrespective of date order: Case C-105/03 Pupino) be interpreted according to EU case law, including Akzo Nobel.

In her opinion in the latter, Advocate General Kokott stated: "112. Finally, the provisions of EU law on the combating of money laundering and terrorist financing, which expressly recognise professional privilege for 'independent legal professionals', were discussed at the hearing before the Court of Justice. Akzo interprets that provision as also covering enrolled in-house lawyers. Such an interpretation might at first sight be supported by the preamble to Directive 2005/60, which refers to 'legal professionals, as defined by the Member States'. It is, however, contradicted by the recommendations of the Financial Action Task Force ('FATF') cited by the Commission, which are to be relied on for the purposes of interpreting that directive; those recommendations expressly exclude salaried in-house lawyers from the category of persons subject to their requirements.

"It is true that these proceedings are not the appropriate forum in which to take a definitive view on the interpretation of Directive 2005/60. For our purposes here, however, it is sufficient to conclude that the provisions of EU law on money laundering and terrorist financing certainly cannot be construed as providing a clear signal in favour of the proposition that legal professional privilege should be extended to enrolled in-house lawyers."

Effect of the new regime

The Legal Services (Scotland) Act provides in s 60 (professional privilege): "(1) Subsection (2) applies to any communication made to or by- (a) a licensed provider in the course of its acting as such in its provision of legal services for any of its clients, (b) a designated person (apart from a solicitor or advocate) within the licensed provider who is acting- (i) in connection with its provision of such legal services, and (ii) at the direction, and under the supervision, of a solicitor.

"(2) The communication is, in any legal proceedings, privileged from disclosure as if the licensed provider or (as the case may be) the person had at all material times been a solicitor acting for the client.

"(3) Subsection (4) applies to any special provision which- (a) is contained in an enactment or otherwise, (b) relates to a solicitor, and (c) concerns- (i) the disclosure of information with respect to which a claim of professional privilege could be maintained, or (ii) the production, seizure or removal of documents with respect to which such a claim could be maintained.

"(4) The provision has effect in relation to a licensed provider, and any designated person (apart from a solicitor) within a licensed provider, as it does in relation to a solicitor but with any necessary modifications.

"(5) This section is without prejudice to any other enactment or rule of law concerning professional or other privilege from disclosure (in particular, as applicable in relation to a solicitor)."

Licensed legal services providers will be subject to the suspicious activity reporting obligation (if not as "independent legal professionals", then as part of the financial services industry). Section 60(5) should avoid any clash between that section and the UK's obligations under the Third Money Laundering Directive.

It achieves this by making it possible, and therefore obligatory (Case 14/83 von Colson) to interpret s 60 as not even purporting to extend to a licensed provider, or "designated person", as such, the privilege exception permitted by article 23(2). If, and only if, the licensed provider happens to be 100% owned and controlled by professionals falling within article 23(2), the "privilege exception" in the Proceeds of Crime Act can be applied directly in relation to eligible communications.

Jim McLean has recently retired as a member of Burness LLP