The obligations placed on independent legal advisors as imposed by the Proceeds of Crime Act 2002, the Terrorism Act 200 and the Money Laundering Terrorist Financing and Transfer of Funds ( Information on Payer) Regulations 2017 ( ‘Regulations’) are far reaching, and come with some scary consequences for those who choose to ignore them. There is no doubt that the focus of Government is now very much on making sure lawyers and other key movers in the business and financial world are not used unwittingly by criminals to further a criminal purpose.
Money laundering and terrorist funding present a serious threat to society causing a loss of revenue and endangering life, and fuelling other criminal activity such as human trafficking. This is very serious stuff and whether you are large or small provider of legal services covered by the Regulations, you would be extremely foolish to bury your head in the sand and do nothing.
There is whole raft of sanctions both professional and criminal that can be imposed for failure to discharge obligations. There is also the risk of civil action and damage to reputation and consequential loss of business. The Regulations are complex and require more than a cursory glance. There is no short cut. There is need for the controllers of a business to obtain a clear and precise understanding of the requirements, and to make sure each and every member of staff shares a similar level of familiarity with the Regulations, in terms of the purpose they serve and how they are applied in practice. This covers not only customer due diligence, which most professionals understand, but also carrying out a practice wide risk assessment, a policy for a risk based approach to assessing the risk level of each transaction retainer, the establishment of systems, polices and procedures to meet the obligations, training, reporting suspicions and the relationship between disclosure obligations and legal privilege. And that’s just for starters!
As mentioned most lawyers have over the years got to grip with the need to carry out customer due diligence before commencing work under a retainer. Obtaining photographic evidence of identification and proof of address has become common place and is now often backed up by electronic background checks to help identify politically exposed persons and the existence of financial sanctions and other restrictions. However, there is now much more to adopting a risk based approach to preventing money laundering. If you are still in working in the age where a quick check on the source of funds to be used for say the purchase of a property would be sufficient, the time has now truly come to review your processes, as the emphasis has changed and changed quite dramatically. The onus is now on ‘Knowing Your Client’. Forget source of funds and enter the world of source of wealth investigation.
So what does this involve? In short, it means gathering information and documents which will help you to check that the client’s financial background fits the nature and purpose of the transaction you are handling. This is very different from the erroneous belief that there is only a need to check the source of funds.
This difference is succinctly described in the Legal Sector Affinity Group’s draft Anti Money Laundering Guidance for the Legal Sector ( September 2017) as follows:
‘In addition, please note that source of funds is different from source of wealth. Source of funds relates to from where the client’s funds are received – a UK bank account for example. Source of wealth relates to how the client came to have the funds in question – via inheritance, house sale, or investment windfall for example. Source of wealth is fundamental to money laundering risk assessment. If you are clear about the legitimacy of a client’s source of wealth, the risk of money laundering is significantly reduced.’
In practice this places an obligation on a business to have a documented process in place to provide for the collection from each client of personal and financial information, as well as detail on the transaction. This will include the age of the client, the client’s occupation and employer, the value of the transaction, the size of the contribution the client is making towards the purchase, the identity of the bank account(s) from which the funds are to be transferred, along with documents to substantiate the accumulation of the client’s wealth.
Clearly without knowing more, a twenty five year old office cleaner purchasing a property for half of a million pounds without a mortgage should ring alarm bells and warrant further investigation. There is nothing in the Proceed of Crime Act which prevents you from making normal enquiries about your clients instructions, and the proposed retainer, in order to remove concerns and to decide whether you wish to continue to act. These enquiries will only constitute tipping off if a SAR has been made or that you are aware a money laundering investigation is underway or contemplated.
So staying with this example, the high level of risk of proceeding with the transaction could be removed if on asking questions, it is discovered the client had recently inherited a substantial some of money. There would be a need to obtain evidence of this, but if this was forthcoming the concern would probably then be satisfactorily addressed.
There would remain, however, a need to continue to monitor the transaction, and if keeping with the same example, you were to discover when it came to exchange of contracts that the client has transferred funds to you from a bank account which was different from the one disclosed, the level of risk could rise once again. The concern may then turn to suspicion. Even though you do not have evidence that a money laundering offence has occurred, the suspicion may lead you to conclude that a SAR should be submitted.
Applying a risk based approached means the level and degree of investigation will vary from one transaction to another. There is therefore no set criteria for detecting and assessing the risk of money laundering. If in this example, for instance, you have had no face too face contact with this client, and you find, after forwarding to you a deposit without prior request, the client decides to withdraw from the transaction without good reason, this could change the complexion of the transaction, and give rise to a concern, and probably a reportable suspicion.
As can be seen, there is a need to be alert throughout the transaction, and to have a process in place to monitor the clients conduct, and to assess this against the background information gathered at the outset. You need to know your client, since without this knowledge, an assessment of the risk of money laundering will simply not be possible, with the consequence you will exposing yourself and your business to possible enforcement action.
Remember customer due diligence per se does not constitute knowing your client. Nor is it safe to assume that as the funds to be transferred originate from a UK based account the risk of money laundering is low.
Not only when scrutinising a clients bank account do you need to satisfy yourself on source of wealth, but you also need to be on the look out for any unusual cash deposits which fall outside your client’s known financial standing, and which could suggest tax evasion. You need to be wary with money or property where you suspect that either is being transferred to avoid the attention of HMRC or a law enforcement agency.
The reality is that once you are exposed to bank statements and other financial information you do take on the responsibility for looking for any sign of criminality, and the consequential obligation to report your suspicions. The more you dig the more responsibility is assumed.
Here are some practical tips:
Review your initial client questionnaires and make sure these are re-designed to collect sufficient information on the client and the transaction to be able to put together a client transaction profile. This can then be used when checking source of wealth. In our office this has been addressed through modifying our case management initial electronic questionnaire and producing a client profile tab.
Make sure all of your staff, including reception and other support personnel, are made aware of the legislative requirements, and know what to look out for, and what to do if a concern arises. All staff should be able to name your Money Laundering Reporting Officer.
Ensure clients are made aware on your website, and in all new business communication, that they will be made the subject of these inquires, and to warn that without cooperation, there could be a delay in the completion of the transaction, and also the possibility of you having to terminate the retainer. Don’t be afraid of telling your clients that you take your legislative responsibilities seriously. This could also help to act as a deterrent to those who may be looking for a business to be used as a vehicle for the furtherance of criminality.
Have a separate file to record and retain CDD results, red flags and all discussions that might take place over concerns. Remember the importance of making sure SAR reports and associated communication are kept of the transaction file and retained separately. This will help to avoid possible tipping off offences. In our office all concern and discussion is recorded on a risk register within our case management systems and this is monitored centrally.
Adopt a similar approach to where funds are to to paid by a third party. For example, a gift. The donor’s wealth should be scrutinised in exactly the same way.
Don’t be put off from adopting a risk adverse policy towards financial crime. We have decided not to accept instructions from corporate clients, those who are politically exposed, and to undertake anything other than straight forward residential transactions. We also do not accept instructions where funds are to be transferred to us from a non UK bank account. Nor do we transfer funds to oversee accounts.
It may run against the grain, yet to say no to a client when you have concerns should be part and parcel of an effective AML policy. In nearly all of the cases in which we have submitted SARs we have decided, following the granting of consent, to terminate the retainer. Why run a risk when it is within your power to end your exposure.
Finally, there is a good case for being over cautious, and to always report when the general consensus is that something is not quite right. Its far better to be safe than sorry.