The primary objective behind many criminal activities is financial gain, often involving substantial amounts of money. Directly depositing large sums from illicit activities, such as drug trafficking, into financial accounts would raise suspicions at banks or investment firms, potentially alerting authorities.
To circumvent detection, criminals engage in various strategies to disguise the origins of these funds, collectively known as money laundering. Money laundering is the act of transforming proceeds from criminal activities (be it cash or other assets) into seemingly legitimate assets.
Money laundering poses a global challenge, involving cross-border fund transfers as well as domestic operations at both small and large scales. The United Kingdom, like many nations, has enacted laws to combat these activities. These laws not only make money laundering illegal but also impose vigilance and reporting obligations on certain professionals and businesses, such as banks and law firms, who could inadvertently be drawn into these schemes.
The cornerstone of UK legislation against money laundering is the Proceeds of Crime Act 2002 (‘POCA’), enforced by the National Crime Agency (‘NCA’). Additionally, regulations like the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 outline specific preventative measures for businesses to avert the misuse of professional services for money laundering purposes.
PHASES OF MONEY LAUNDERING
Money laundering typically unfolds in three distinct stages: placement, layering, and integration. Beyond these phases, the comprehensive legal definition of money laundering offences also encompasses the mere possession of criminal property, classifying it as part of money laundering activities.
2.1 INITIATION OF MONEY LAUNDERING: PLACEMENT
In the realm of money laundering, the initial step from a criminal's viewpoint is known as placement. This stage involves introducing the cash acquired from criminal activities into the financial system. Given that banks and financial institutions have established anti-money laundering protocols, criminals often seek alternative methods to insert their illicit cash into the financial system, bypassing these safeguards.
2.2 CONCEALMENT PHASE: LAYERING
Following the initial placement of criminal proceeds into the financial system, the layering phase commences. This stage is characterised by the deliberate obfuscation of the origins of these proceeds through a series of intricate financial transactions. The primary aim here is to disrupt the audit trail, rendering it challenging for law enforcement agencies to trace the source of the funds. These transactions frequently involve various entities, such as corporations and trusts, and may occur across multiple international jurisdictions, further complicating the tracing process.
2.3 LEGITIMIZATION PHASE: INTEGRATION
In the final phase of money laundering, known as integration, the criminal proceeds, now with obscured origins, are reintroduced as apparently legitimate funds or assets. This stage involves investing the laundered money into legitimate businesses, investments, or other financial activities. Common methods include using an independent legal professional to purchase property, establish trusts, acquire companies, or settle legal disputes, among other transactions. This integration effectively masks the illicit origins of the funds, making them appear as lawful assets.
2.4 EXEMPLIFYING MONEY LAUNDERING
Consider a theoretical situation where a criminal involved in human trafficking has amassed a substantial amount of cash.
Stage 1: Placement
Initially, in the placement phase, the criminal would need to establish a bank account, if they don’t already possess one, and deposit the illicit cash into this account.
Stage 2: Layering
The second phase, layering, involves transferring the deposited money to various other accounts, potentially including some in foreign countries. These transfers might be camouflaged as legitimate business payments for goods or services. The ultimate goal is to ensure the funds end up in different accounts from where they were originally deposited, with a deliberately complex transfer route making it extremely challenging for investigators to trace the funds back to their criminal source.
Stage 3: Integration
In the integration stage, the laundered money is assimilated into the regular economy. For instance, the trafficker might invest in rental properties using the laundered money, subsequently declaring any income derived from their criminal activities as rental income, even going as far as paying taxes on it.
The Role of Solicitors
Certain businesses are more prone to encountering money laundering, either knowingly or unknowingly. These include credit institutions, investment firms, banks, property trading companies, casinos, and similar entities. Solicitors working in these sectors are more likely to come across money laundering scenarios. Typically, a solicitor's involvement occurs during the layering or integration stages.
A money launderer looking to purchase property with illicit funds would require conveyancing services. Additionally, a solicitor might notice red flags, such as a client paying legal fees from multiple accounts, indicative of potential layering activities.
DIRECT INVOLVEMENT IN MONEY LAUNDERING OFFENCES UNDER POCA
POCA, the Proceeds of Crime Act, delineates key offences related to money laundering, including concealment, arrangement, and the acquisition, use, or possession of laundered property.
3.1 Overview
Applicability
POCA’s scope encompasses all individuals. However, specific offences, such as failure to report and tipping off, are limited to individuals engaged in the 'regulated sector.' This sector consists of entities required to implement procedures to identify and prevent money laundering. They form part of the financial services community and fall under the regulatory umbrella of Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) of the Bank of England (former the Financial Services Authority (‘FSA’)). Members of this sector include banks, insurance firms, legal practices, and accountancy firms.
Definition of 'Predicate Offence’
Money laundering offences are predicated on the assumption that an initial criminal act has generated the property subject to laundering. This initial crime is referred to as a 'predicate offence.' It is important to note that a conviction for the predicate offence is not a prerequisite for prosecuting a money laundering offence. POCA clarifies that laundering the proceeds from any criminal activity is, in itself, an offence.
Associated Crimes
In relation to the principal money laundering offences, it is also illegal to conspire, attempt, or be involved in planning to launder proceeds of crime. This includes counselling, aiding, abetting, or procuring the laundering of money.
Sanctions. The maximum legal penalty for any principal money laundering offence can be as severe as 14 years in prison, an unlimited fine, or both.
3.2 The Offence of CONCEALING Under POCA
Core Components
Concealing is recognised as a primary money laundering offence under the Proceeds of Crime Act (POCA). An individual perpetrates this offence by concealing, disguising, converting, transferring criminal property, or relocating criminal property outside the UK. 'Criminal property' encompasses any assets derived from criminal activities, including but not limited to money, both real and personal property, and intangible assets, regardless of their location. The act of concealing or disguising pertains to masking the nature, source, location, disposition, movement, or ownership of the property.
This offence could be committed if someone, having profited from illegal gambling operations in the UK, decides to invest these proceeds in a foreign real estate venture. The act of channelling the funds abroad, particularly with the intent to disguise their illicit origin, falls under the definition of concealing in the context of money laundering.
3.2 DEFINING THE OFFENCE OF CONCEALING IN MONEY LAUNDERING
Core Components
Under the Proceeds of Crime Act (POCA), the act of concealing stands as a major offence in the realm of money laundering. This offence is committed when an individual engages in activities such as hiding, altering, converting, transferring, or moving criminal property out of the UK. 'Criminal property' is a broad term that includes all forms of assets gained from criminal conduct, ranging from financial assets to tangible and intangible properties, irrespective of their geographical location. The essence of concealing involves obscuring aspects like the origin, current location, ownership, or the true nature of these assets.
Consider a case where an individual gains substantial revenue from unlawful cyber activities in the UK. If this person then uses these illicit funds to acquire luxury assets in another country, this action constitutes the offence of concealing.
Or
This offence could be committed if someone, having profited from illegal gambling operations in the UK, decides to invest these proceeds in a foreign real estate venture. The act of channelling the funds abroad, particularly with the intent to disguise their illicit origin, falls under the definition of concealing in the context of money laundering.
The key element here is the intentional effort to veil the illegal origins of the funds by investing them in seemingly legitimate assets overseas, aligning with the definition of concealing in money laundering contexts.
Mental state requirement
For an individual to be held liable for the offence of concealing under the Proceeds of Crime Act (POCA), a specific mental state is required. The offender must subjectively 'know or suspect' that the property in question is derived from or is a benefit of criminal conduct. This means the individual must have either actual knowledge or reasonable suspicion regarding the illicit origins of the property to be culpable for the offence.
Defences against Concealing Offence.
Authorised Disclosure Defence
A valid defence against a charge of concealing under the Proceeds of Crime Act (POCA) is the authorised disclosure of information. If an individual informs the police, a customs officer, or a designated officer within an organisation about the transfer, this can be a defence. For the disclosure to be effective, it should ideally occur before any prohibited act is carried out. However, if the disclosure is made during the act, it can still serve as a defence if:
The individual had no prior knowledge or suspicion when the act commenced;
The disclosure was made as promptly as possible after gaining relevant knowledge or suspicion;
The disclosure was initiated by the person themselves, rather than being triggered by the prospect of discovery or prompted by someone else.
If the disclosure happens after the prohibited act, it must be demonstrated that there was a valid reason for not disclosing earlier.
Legal Professional Privilege as a Defence
A solicitor may be exempt from disclosing information if legal professional privilege is applicable. However, this privilege is not valid if the solicitor is aware that the transaction involves a money laundering offence. The situation is more complex if there's only suspicion of a potential offence. If the suspicion is accurate, communications with the client are not privileged and can be disclosed. If the suspicions turn out to be baseless, the communications remain privileged and, thus, are protected from disclosure.
3.3 THE OFFENCE OF ARRANGEMENT UNDER POCA
Core Components
The Proceeds of Crime Act (POCA) defines 'arrangement' as an offence, encompassing a broad spectrum of activities typically involved in the layering and integration stages of money laundering. This offence includes any arrangement where the individual knew or suspected that their actions facilitated the acquisition, retention, use, or control of criminal property, either directly or on behalf of another person.
A scenario might involve a solicitor arranging for an investment in a start-up business with funds sourced from illegal drug trafficking. If the solicitor is aware or suspects the illicit origin of these funds, their action in facilitating this investment would constitute the arrangement offence under POCA.
Exceptions in Litigation and Dispute Resolution
While solicitors can be implicated in the arrangement offence during their professional practice, the offence does not encompass the standard conduct of litigation or dispute resolution. This includes all legal procedures from the initiation of a case to its final resolution, as well as typical activities in settlements, negotiations, alternative dispute resolution, and tribunal representation. However, this exception does not apply to contrived litigation designed for laundering purposes. A sham case may be identified if there's a fabrication of claims or damages specifically for laundering criminal property. The offence would occur at the point of judgement execution or settlement completion.
Imagine a case where a solicitor is approached by a client to handle a legal dispute involving a large sum of money. The client and the opposing party are, in reality, colluding to create a fake legal battle. They plan to use the legal proceedings to move large amounts of illicit money under the guise of legal settlements. If the solicitor suspects or knows about the true nature of this scheme and still proceeds, they may be committing the arrangement offence.
Available Defences
The defences applicable to the concealing offence also apply to the arrangement offence.
3.4 OFFENCE OF ACQUISITION, USE, OR POSSESSION
Core Components
The Proceeds of Crime Act (POCA) also categorises the acquisition, use, or possession of criminal property as an offence. In this context, possession refers to having physical control over criminal property.
Consider a scenario where a client approaches a solicitor with a high-end laptop, offering to sell it for a significantly reduced price, say £200, whereas its market value is around £2,000. The solicitor, aware of the unusually low price, purchases and takes possession of the laptop. In this case, the solicitor, having suspicions about the legality of the item's procurement, may be guilty of the offence of acquisition as defined under POCA.
Defences against Acquisition, Use, or Possession Offences
Common Defences
The defences applicable to the offences of concealing and arrangement under the Proceeds of Crime Act (POCA) are also relevant for the offences of acquisition, use, or possession of criminal property.
Defence of Adequate Consideration
An additional defence for these offences is available under the criterion of adequate consideration. This means that a person cannot be charged if they have, in good faith, paid a reasonable amount for an item without the knowledge of its illicit origins. However, this defence is not valid if the person is aware or suspects that the goods or services obtained in exchange for the criminal property might facilitate further criminal activities.
This defence is particularly pertinent for professional advisers, including solicitors, who receive payments for their services, whether directly from the client or through a third party on behalf of the client. It also extends to cover disbursements. The fees charged must be reasonable and proportionate to the services rendered. If the value of the professional services is significantly less than the amount received, then this defence is not applicable.
OFFENCES OF INDIRECT INVOLVEMENT IN MONEY LAUNDERING
The UK legal framework incentivises the reporting of dubious financial activities by criminalising non-reporting in specific instances, a factor that significantly impacts solicitors.
4.1 Duty to Report
Reporting Responsibilities
Under the Proceeds of Crime Act (POCA), solicitors, along with professionals like bankers and jewellers, are required to submit 'suspicious activity reports' (SARs) upon suspecting money laundering activities. Similarly, the Terrorism Act 2000 has comparable requirements for reporting suspicions or reasonable grounds of terrorist financing. Not filing a SAR when necessary constitutes an offence.
Indicative Activities
Solicitors need to remain alert to certain transactions indicative of money laundering, especially if a client proposes paying in cash.
These include:
Frequent transfers across various bank accounts, often in different names, banks, or countries;
Investment purchases followed by immediate liquidation;
Unusual overpayment of taxes; or
Depositing substantial amounts with professionals like solicitors or accountants, followed by requests for refunds.
A solicitor is approached by a client who wants to deposit £150,000 into the solicitor’s client account, supposedly for a property transaction. Shortly thereafter, the client cancels the transaction and requests the return of the funds. The solicitor, in this case, should consider filing a SAR.
Scope of Information
The obligation to report includes any information solicitors come across in their professional capacity, not limited to client-specific information. This extends to information regarding potential clients, their associates, business transactions, and even the solicitor's own business dealings.
Timing for Disclosure. While disclosures should be made as soon as practical, a brief delay might be permissible if it results from the solicitor seeking legal advice, provided they act swiftly in doing so.
Required Mindset
An offence can occur if a solicitor fails to report upon encountering information that reasonably warrants suspicion. This is an objective standard; solicitors are expected to recognise and act on clear indications of money laundering, not deliberately overlook them.
Available Defences
Legal Privilege
Failure to report is defensible if the information falls under legally recognised privilege not invalidated by anti-money laundering regulations.
This includes information obtained:
Directly from a client or their representative about legal advice;
From someone seeking legal advice; or
Related to actual or anticipated legal proceedings.
Under legal advice privilege, a solicitor advising on compliance issues in a corporate merger might be covered. In terms of litigation privilege, a solicitor gathering evidence for a client's legal defence in a court case would also be protected.
Insufficient Training
A defence exists for employees who lack awareness or suspicion of money laundering due to inadequate training. However, the firm's partners might face prosecution for failing to provide necessary training. Notably, lacking training is not a valid defence for charges related to terrorist financing.
4.2 AVOIDING TIPPING OFF OFFENCES
In the context of the Proceeds of Crime Act (POCA), solicitors need to be cautious of two specific 'tipping off' offences:
Revealing to an external party that a suspicious activity report (SAR) has been filed with entities such as the police, HM Revenue and Customs, the National Crime Agency (NCA), or the firm's money laundering reporting officer (MLRO), particularly if this revelation could undermine potential investigations.
Notifying a third party about an ongoing investigation related to money laundering.
This offence can transpire through various forms of communication, be it oral or written, and can be both direct and indirect, such as inadvertently disclosing sensitive details in publicly accessible documents.
A client approaches a solicitor with a request to deposit a large sum of money, say £200,000, into the firm's client account, ostensibly for a forthcoming real estate deal. The client vaguely attributes the funds to a 'recent inheritance.' The solicitor, skeptical and unable to confirm the inheritance story, is in a quandary as the firm's MLRO is temporarily unavailable.
Opting for caution, the solicitor informs the client of an unforeseen delay in processing the transaction, citing administrative reasons. If the client becomes alert to the potential of an investigation based on the solicitor's actions, it could constitute a 'tipping off' offence under POCA.
Exemptions from Tipping Off Offences
Standard Client Inquiries
Under the Proceeds of Crime Act (POCA), solicitors and firm employees are not prohibited from making usual inquiries about their client’s instructions or the details of the retainer. These actions are essential for clarifying any ambiguities and deciding whether to accept or continue a retainer. Tipping off only becomes a concern if during these inquiries, the solicitor reveals the existence of a suspicious activity report (SAR) or mentions that a money laundering investigation is in progress or being considered.
In a scenario where a solicitor is advising on a complex merger, they seek detailed information from the client about the businesses involved and the transaction's structure. Despite initial reservations, the solicitor intensifies their inquiries both to alleviate any suspicions of illegal financial activities and to better understand the client's legal needs. Conducting such detailed inquiries is not only permissible but recommended, provided that no disclosure is made about any potential SAR or ongoing investigation.
Disclosure in Engagement Terms
Including a statement in the standard terms of engagement about the firm’s responsibilities under anti-money laundering legislation is not deemed tipping off. This inclusion is a straightforward way to communicate the firm's statutory duties without infringing upon the regulations against tipping off.
Legal Defences Against Tipping Off
Solicitors are shielded from committing a tipping off offence in specific scenarios of permitted disclosure:
Disclosures Within the Same Organisation or Group
It’s not considered an offence for an employee, officer, or partner of a legal firm to disclose information about a suspicious activity report (SAR) to another employee, officer, or partner within the same legal entity.
Additionally, disclosures between legal professionals in different firms are exempt from tipping off offences when:
The firms are linked by common ownership, management, or control; and
They operate within a European Economic Area state or a jurisdiction with anti-money laundering regulations on par with the European Union.
A solicitor in the conveyancing department of a law firm makes a SAR regarding a client transaction. Another solicitor in the firm’s criminal law division, working on a related case for the same client, inquires about the delay. The conveyancing solicitor explains that they are awaiting feedback from the NCA regarding the SAR. This intra-firm disclosure does not constitute a tipping off offence.
Disclosures Between Different Institutions
A legal professional is exempt from tipping off charges under the following conditions:
The disclosure is to another legal professional in an EEA state or a country with equivalent money laundering regulations;
It involves a common client, transaction, or service;
The purpose of the disclosure is to prevent a money laundering offence;
Both parties uphold similar standards of confidentiality and personal data protection.
A UK solicitor, working on a multinational merger, collaborates with a lawyer in Germany. The UK solicitor, having filed a SAR, informs the German lawyer to avoid inadvertently facilitating a money laundering offence. This inter-jurisdictional professional disclosure is not considered tipping off.
Additional Legitimate Disclosures
Disclosures made to supervisory bodies or for the purposes of preventing, investigating, or prosecuting criminal activities, either domestically or internationally, do not constitute an offence. This also includes disclosures made under POCA or for enforcing court orders. Moreover, a legal adviser can disclose information to their client to deter them from engaging in illegal activities without risking a tipping off offence.
4.3 IMPACTING AN INVESTIGATION: LEGAL CONSIDERATIONS
Fundamental Aspects
The offence of adversely affecting an investigation is established when an individual:
Recognises or has grounds to suspect the presence or potential initiation of an investigation related to money laundering, asset confiscation, or civil recovery; and
Communicates information to someone that might impede the investigation; or
Manipulates, conceals, or destroys documentation relevant to the investigation, or causes these actions.
This offence does not necessitate an intent to disrupt the investigation, akin to tipping off offences. Moreover, it extends to individuals outside the regulated sector, broadening its scope.
Legal Exemptions
Unawareness or Lack of Suspicion
A key defence is available if the individual disclosing the information did not comprehend or suspect that such disclosure would be detrimental to the investigation, was unaware of the documents’ relevance, or did not aim to mislead the investigators.
A solicitor is overseeing a high-value commercial deal and notices unusual hesitation from the counterparty. Suspecting a SAR might be involved, the solicitor, confident of their client’s legitimacy, informs their client about the potential cause of the delay. This action would not constitute an offence as it lacks an intent to obstruct any related investigation, provided the solicitor adequately documents their reasoning.
Disclosures within Legal Advice
It's defensible if a disclosure is made by a legal adviser to a client or their representative while providing legal counsel, or in the context of actual or contemplated legal proceedings, as long as the intention is not to facilitate criminal activities.
A client consults a solicitor about potential legal action against another party for undue delays in a financial transaction. The solicitor, suspecting the delays might be due to a SAR related to money laundering concerns filed against the client, candidly discusses these suspicions with the client. Providing such advice, devoid of any intent to further criminal objectives, does not amount to committing an offence.
UNDERSTANDING THE MONEY LAUNDERING REGULATIONS 2017
5.1 Range and Relevance
The 2017 Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations stipulate comprehensive customer due diligence requirements. These guidelines compel professionals to have in-depth knowledge of their clients and consistently oversee how their services are utilised, specifically to prevent money laundering.
Scope of Regulated Professional Activities
These regulations are pertinent to legal professionals when their activities pose a risk of being implicated in money laundering.
Such risk-laden activities include:
Facilitating the purchase or sale of real estate or corporate entities;
Management of client funds, securities, or other types of assets;
Involvement in setting up or managing banking, savings, or investment accounts;
Contributing to the establishment, functioning, or governance of corporate entities; or
Formulating, operating, or administering trusts, corporate structures, foundations, or comparable entities.
A legal professional is considered actively involved in a transaction if they provide assistance in strategising or executing it, or represent or act on a client's behalf within the transaction.
For instance, a solicitor is engaged by a client to assist in structuring a series of international investments involving several offshore trusts. This activity squarely falls under the purview of the Regulations, owing to the solicitor's involvement in complex financial arrangements with heightened risks of money laundering.
Exclusions from the Regulations
Certain activities are typically not considered as engagement in a financial transaction under the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017:
Offering legal advice to clients;
Drafting wills, though solicitors should evaluate if any related tax advice falls under the Regulations; and
Should there be any uncertainty about the applicability of these Regulations to specific legal work, solicitors are advised to seek further legal guidance on their practice's unique circumstances, or to err on the side of caution by adhering to the Regulations comprehensively.
Mandatory Establishment of Anti-Money Laundering Procedures
Businesses under the scope of these Regulations, including legal firms, must implement specific measures to prevent their services from being exploited for money laundering or terrorist financing.
These include:
Developing and implementing customer due diligence processes, such as accurately identifying and verifying the identity of the client and any beneficial owner, possibly through documents like driving licences or passports;
Appointing a dedicated money laundering reporting officer (MLRO) to handle reports of suspicious activities or potential money laundering;
Instituting robust systems and protocols to detect, deter, and prevent money laundering and financing of terrorism; and
Ensuring that client-facing staff receive comprehensive training about money laundering and terrorist financing risks, as well as on the firm's related internal procedures.
5.2 THE ROLE OF A MONEY LAUNDERING REPORTING OFFICER (MLRO)
Under the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017, firms within the regulated sector, including legal practices and banks, are mandated to appoint a Money Laundering Reporting Officer (MLRO). This role, however, is not compulsory for individual practitioners who work independently without employing others or collaborating with colleagues.
Criteria for an MLRO
Selecting an MLRO is a decision of considerable importance due to the weighty responsibilities attached to the role.
An ideal MLRO should:
Possess adequate experience and understanding of anti-money laundering regulations and practices.
Hold a senior position within the firm, enabling them to make critical decisions on reporting activities that may influence the firm’s client relationships and its susceptibility to legal, regulatory, and disciplinary consequences.
Have sufficient authority to access all client files and business data, ensuring informed decision-making based on a comprehensive review of all pertinent information held by the business.
Responsibilities and Functions of the MLRO
Direct Communication with Authorities
The primary duty of an MLRO is to ensure that any information suggesting knowledge, suspicion, or reasonable grounds for suspicion of money laundering is appropriately reported to the relevant authorities. Crucially, the MLRO's decision to file or not file a report is autonomous and should not require approval from others. As the primary contact point between the firm and the National Crime Agency (NCA), the MLRO coordinates with the NCA or law enforcement about proceeding with transactions and the extent of information that can be shared with clients or third parties.
Additional Obligations
Beyond reporting, the MLRO's role extends to:
Evaluating internal reports of suspicious activities, conducting further investigations when necessary, and, where applicable, filing SARs with the NCA.
Deciding if consent is needed to continue with a client engagement or any part of it, and guiding how the business should operate while awaiting this consent.
Overseeing the firm's training on anti-money laundering.
Providing advice on handling work post-reporting, to mitigate risks of tipping off or jeopardising investigations.
Developing and implementing internal anti-money laundering protocols and systems.
Reporting Procedures within the Firm.
Requirement for Reporting to the MLRO
It’s mandatory for internal reports of suspicious activities to be directly submitted to the MLRO. Merely informing a line manager or colleagues does not fulfil legal obligations. While discussing suspicions with superiors or peers can help validate one’s concerns, the ultimate responsibility to report to the MLRO is non-transferable and rests with the individual who identifies the suspicion, regardless of their position in the firm.
Handling MLRO Absences
In cases where the MLRO is unavailable, it's advisable for firms to designate an acting or deputy MLRO and inform staff about this interim arrangement. If no alternative is appointed and an MLRO is absent, a solicitor must report any suspicions directly to the NCA to avoid delays that could potentially harm the investigation.
5.3 IMPLEMENTATION OF CUSTOMER DUE DILIGENCE (CDD)
Essential Identification and Verification Processes
Regulatory mandates require businesses within the regulated sectors to implement Customer Due Diligence (CDD) practices. These practices are crucial for businesses to effectively identify potential money laundering activities by their clients.
Key components of CDD include:
Establishing the identity of the client and verifying it using reliable, independent sources. For individuals, documents like passports or driving licences that include photo identification, coupled with detailed written information, are highly credible for identity verification.
In cases where there is a beneficial owner different from the client, identifying this individual and taking appropriate steps to verify their identity based on a risk-sensitive approach. This process involves understanding the ownership and control structures of any involved legal entities, trusts, or similar arrangements.
Gathering information about the purpose and intended nature of the business relationship to comprehend the context and scope of the transactions or services involved.
Scenarios Necessitating Customer Due Diligence (CDD)
CDD becomes imperative for solicitors in the following situations:
When initiating a business relationship;
While conducting a standalone transaction;
If there is suspicion of money laundering or terrorist financing activities;
If there are doubts regarding the authenticity or sufficiency of previously acquired CDD information.
Initiation of a Business Relationship
A business relationship, in this context, refers to a solicitor-client engagement which, from the outset, is expected to persist over a period. This would apply to ongoing or repeated interactions rather than one-off consultations or transactions.
Execution of a Standalone Transaction
A standalone transaction, not part of an ongoing business relationship, that amounts to or exceeds 15,000 euros requires CDD. This applies whether the transaction is executed in one go or through several linked operations.
Timing for Implementing Customer Due Diligence (CDD)
Prior to Forming Relationships. It is imperative for solicitors to conduct CDD, including verifying identities of clients and any beneficial owners, before establishing a business relationship or executing an occasional transaction.
If unable to complete CDD beforehand, solicitors must refrain from:
Processing transactions through bank accounts for the client;
Initiating any business relationships or conducting occasional transactions.
Additionally, they should:
Terminate any ongoing business relationships;
Consider reporting to the National Crime Agency (NCA).
Exception to Immediate Verification. There is an allowance for completing the verification of a client and any beneficial ownership shortly after initial contact if:
Immediate verification could disrupt standard business operations; and
The risk of money laundering or terrorist financing is assessed as low. This exception does not extend to occasional transactions.
Continuous Updating of Information
CDD isn’t a one-time procedure and should be revisited, especially when there’s a suspicion of money laundering, terrorist financing, or doubts about the adequacy of existing identification data. If current information is deemed insufficient, it should be updated promptly.
Application to Trusts and Other Legal Entities
In the context of trusts or similar legal arrangements involving beneficiaries, CDD must include verifying the identity of beneficiaries before any distribution of trust assets or exercise of their rights. Solicitors should not proceed with significant actions or allow client account transactions until full verification is completed.
Legal Advice and Litigation Exception
The obligation to cease acting and contemplate reporting to the NCA in the absence of complete CDD does not apply when a solicitor is offering legal advice or is involved in litigation or alternative dispute resolution. This exemption does not cover transactional work, thus necessitating a careful distinction between advisory, litigious, and transactional activities.
5.4 REQUIREMENTS FOR RECORDKEEPING
Maintaining accurate records is a crucial aspect of compliance under the Money Laundering Regulations. These records include client identities, verification evidence, details of business relationships, occasional transactions, and ongoing monitoring activities. A business’s recordkeeping system should specify the type of records to be maintained, their format, and the retention period.
Management of CDD Documentation
Firms may choose to store either copies of the verification materials or references to these documents, ensuring easy retrieval when required.
Documenting Suspicions and Reports
It is essential for firms to keep detailed records of any suspicions and subsequent disclosures, as making an authorised disclosure about a suspicious activity can serve as a defence in criminal proceedings.
These records should encompass:
Concerns raised by staff or relevant persons;
Consultations with the MLRO regarding these concerns;
Legal advice sought and obtained concerning these issues;
Justifications for deciding that the concerns did not warrant a suspicion or a report; and
Copies of any filed reports.
Retention Period for Records. As a general rule, records related to CDD and business relationships should be preserved for a period of five years following the termination of the relationship. This duration ensures that pertinent information is available for a reasonable period should it be needed for subsequent investigations or inquiries.
5.5 EMPLOYEE TRAINING REQUIREMENTS
Under the Regulations, it's mandatory for all 'relevant' employees to receive training on laws pertaining to money laundering and terrorist financing. This training should enable them to identify and handle transactions potentially linked to these illegal activities. Generally, client-facing staff and at least the senior support staff are classified as 'relevant employees’.
Comprehensive Training Content. Effective training programs for relevant employees should include:
Detailed information on relevant laws, contextualised to the specific environment in which the business operates, helping employees recognise signs of potential money laundering within that context.
Guidance on identifying 'red flags' in daily business activities.
Instructions on handling transactions that might be linked to money laundering or terrorist financing, including how to utilise the business’s internal systems for consultation, advice, and reporting.
Information on evaluating and establishing valid suspicions.
Training on maintaining confidentiality and preventing any actions that might inadvertently tip off or alert potential money launderers.
Frequency and Timing of Training. It's incumbent on businesses to provide this training at regular and appropriate intervals. The specific frequency of these training sessions should be determined based on the unique needs and circumstances of each business, ensuring that all relevant employees are consistently up-to-date with the latest legal requirements and best practices.
5.6 GUIDELINES FROM THE SRA FOR REGULATORY COMPLIANCE
The Solicitors Regulation Authority (SRA) recommends the following best practices for legal firms to adhere to the Money Laundering Regulations:
Whenever possible, meet clients face-to-face for ID verification using original documents. Implement additional verification measures when an in-person meeting isn’t feasible.
Utilise client accounts exclusively for holding funds related to legal transactions.
Conduct in-depth investigations for significant cash transactions, particularly when the source of funds is ambiguous or originates from high-risk jurisdictions (such as Bosnia and Herzegovina, North Korea, Ethiopia, Iran, Iraq, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Vanuatu, and Yemen).
Seek guidance from the MLRO for any concerns about the legitimacy of a client or transaction.
Ensure that any Suspicious Activity Reports (SARs) submitted to the MLRO are precise and factual.