Gifts Donors and Anti Money Laundering

The rise in gifted deposits has without doubt created further work for conveyancers.  Not only is there a need to check the nature of the contribution and to take steps to ensure a lender is aware of the gift, a conveyancer is also  obliged to consider exposure to liability under the anti money laundering legalisation.    

On the face of it the donor of the gift is not a client, there is no retainer. This raises the question of whether the legislation can be said to impose an obligation.  Interesting the Legal Sector Affinity Group Anti-Money Laundering Guidance for the Legal Sector ( March 2018) contains no reference whatsoever to the donation of gifts and of any requirements in relation to the donation of funds towards the purchase of a property. 

The customer due diligence (‘CDD’) obligation clearly only relates to a person who retains a conveyancer to undertake a service which is regulated under the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ( ‘Regulations’).  Strictly speaking a donor is not a client, and would not on the face of it be covered by Regulation 27 of the Regulations, that requires CDD to be applied when establishing a business relationship. Logically this must be correct,  The Donor has no direct relationship with the conveyancer, there is no retainer to provide a service, and the only connection is the existence of a relationship between the client and the donor.  

In fact, there is a duty on the conveyancer to advise the donor to seek independent legal advice before gifting the funds.  Clearly, if independent advice is sought the legal advisor would need to carry out CDD on the donor before providing that advice.  The same would apply if the contributor was looking to acquire a beneficial interest in the property to be purchased and sought separate legal advice for that purpose. 

So the starting point is there is no obligation on a conveyancer to undertake CDD on a donor unless with reference to Regulation 27 there is a suspicion of money laundering or terrorism funding.   

It could also be argued that if the donor is to send the funds directly into the conveyancer’s client account and the amount is £15,000 or over that this could be viewed as an ‘occasional transaction’, in which event there would be a need to undertake CDD on the donor. 

The more tricky question is whether there is a need to undertake a source of fund and wealth check on the donor where no suspicion of money laundering exists.  There is clearly an obligation to make checks on the funds to be used by a client to purchase a property as well as on the general wealth of the client.  But the question is does that obligation extend to checking where the donor has acquired the funds and  whether the amount of funds made available fits with the profile of the donor?  Again, the Guidance is not very helpful and has little if anything on what checks should be made. 

If a client says funds are coming from Granny then clearly there is a need for the client to produce evidence that is so, and to see a bank statements showing the money leaving Granny’s account and being credited to the clients account.  

If the funds are to be paid directly into the client account then there would be a need to make sure the source of those funds is checked and verified.   I mention that CDD would also need to be performed.    

The Guidance makes reference to ‘Know Your Client’ and of the need to capture information which will allow a conveyancer to create a profile of the client to assess the whether there is a fit between this and the nature and size of the transaction.  The difficulty with a donor is that as he or she is not your client it might be difficult without asking the right questions to carry out this assessment.  There are also data protection to consider and the related practical difficulties  in relation to privacy notices. 

There are some interesting academic questions surrounding the application of the Regulations  in relation to gift donations and the answer may be that conveyancers should be insisting that a donor instructs an independent advisor and requests that adviser to confirm that all CDD and AML checks have been undertaken.   

In the absence of that step, it seems the safest solution would be to always carry out CDD on donors as well as checks on the source of funds and wealth.  We treat a donor in the same way as the client and have  created a ‘pack’ which we send the donor to provide a privacy statement, to explain what is required, and to obtain the information we need to make sure that can carry out adequate checks on the donor’s funds and wealth.  

This may be viewed as excessive, but with the presence of some serious  crime sanctions for non compliance it is far better in my mind to be over cautious. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Financial Crime - Conveyancing File Access Requests

The focus on financial crime detection is unlikely to diminish. On the contrary, it I likely to intensify and with this there will no doubt be a marked increase in requests from law enforcement agencies for access to client files.  

There are several powers available to those conducting financial crime investigations, and there is a need for all conveyancers to understand the obligations these create, and how the discharge of these should be balanced with the requirement to keep client’s information confidential. 

The probability of receiving a request for access is high, and the need to be prepared, and to prepare your staff on what to do if a request is received, is one which you would be foolish to ignore. 

The conflicting professional obligations are contained in Chapter 4 and 5 of the SRA Code of Practice. The former places an obligation on you to keep the affairs of clients confidential, unless disclosure is required at law, or the client consents. The latter Chapter states you must comply with court orders which place obligations on you. 

Normally, the starting point for the enforcement agent is to serve a S29 Data Protection Act notice asking for information on a client for the purposes of the prevention, detection or investigation of a crime. The notice, if you comply with it, provides a defence to a claim of a data protection breach, yet it will not, and this is important to note, override your obligation of confidentiality.  

So what do you do? To begin with, you should make sure that the request is referred to the appropriate person within your organisation. It should go without saying, that you should have a plan in place to be relied on in the event of a request, for responding, dealing with clients and other relevant third parties and advisers. 

It is important to remember, that unless you are in receipt of instructions from the client under investigation relating to the enquiry, it is a breach of confidentiality to confirm or deny you act for the client. If however your engagement is already known, ( for example you are advised that your details were found during the investigation ), then there would be no harm in accepting your connection to the client. 

Either way, you should advise the enforcement agency that you will not be able to grant access without a court order. 

You should also advise your professional indemnity insurers of the request straight away. Some policies will enable you to seek specialist advice on how best to respond, and on the more complex issue of which parts of the file are privileged from disclosure, and those which are not. Also consider contacting the SRA Ethics Helpline to seek guidance. 

You should also ensure that all files are available, since once an order for the production of the file is made you will normally only have 7 days to respond. 

Ask the investigator whether it is possible to contact the client to seek consent for the disclosure. Normally you will be told not to ‘tip off’ the client, and if you are, then you must make sure there is no contact with the client. Instead wait for the Order to be produced. Make sure all staff who have involvement in the transaction ( if ongoing ) are alerted and open a separate file to record and retain documents relating to the request. 

Also consider whether there is a need to submit a suspicious activity report. This is mainly relevant when you are acting for a client in a property transaction at the time the access request is received. This should put you on immediate alert of a possible money laundering offence, and if doubts about the source of funds or wealth also exist, your Money Laundering Reporting Officer will need to consider whether a SAR should be submitted. 

So to recap, never disclose a file without your client’s consent ( assuming you are in a position to seek this) , always invite the enforcement agency to apply for a production order, ensure you seek professional specialist advice either though your PII insurers or by going direct to an adviser, and then make sure you start preparing for the arrival of the production order. 

The agency will normally give you notice of when the application for the production order is to made ( normally within a 28 day period ), and will ask if you wish to be in attendance at the hearing of the application. Unless advised otherwise, there is no real need to attend the hearing, though it is worth asking for the time to comply with the order to be extended from 7 ( the standard ) to 14 days. 

There are several different notices and orders that can be sought depending on the nature of the investigation. Normally when property is concerned, and money laundering is suspected, the enforcement agency will seek a production order under s345 of the Proceeds of Crime Act 2002. The other likely option is to seek a production order under schedule 1 Police and Criminal Evidence Act 1984. 

Neither of these two orders will require your to produce material that is subject to legal professional privilege. 

On receiving the production order immediately refer this to your advisor, and begin copying the material in readiness for production. You will need to consider whether the order has been obtained correctly, whether it is clear in its terms ( not, for example, drafted too widely ) and whether there are any parts of the file which should be redacted or excluded under legal professional privilege.  

What amounts to legal professional privilege is not an easy question to address, and even specialist advisors often struggle to provide definitive guidance on this issue. In the conveyancing arena the relevant head of privilege is advice privilege.  In a conveyancing transaction all communication between you and a client is covered by privilege even though it does not contain advice e.g communication with, instructions from, and advice given to the client in the performance of your legal duty as adviser. This includes all working papers, your bill of costs and completion statement, and information imparted by prospective clients in advance of a retainer. Advice privilege does not however attach to the clients ledger and the actual conveyancing documents. 

Legal professional privilege can be displaced by the crime/fraud exception where documents form part of a criminal or fraudulent act or communications which take place in order to obtain advice with the intention of carrying out of an offence. This applies even when you are not aware that you are being used for that purpose.  Arguably, in the context of a conveyancing transaction where there is prima facie evidence of money laundering or attempted money laundering, this could mean that the whole of your file would need to be produced. 

As you will see this is a very complex area of law and specialist advice should always be sought. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Your obligations under the Criminal Finances Act 2017

The pages of legal journals, and other publications, are currently filled with information and guidance on GDPR and Anti Money Laundering, yet there is very little commentary on the far-reaching obligations imposed by the Criminal Finances Act 2017 (‘Act’). It received royal assent the 27th April last year, and contains some of the most far-reaching changes to anti-money laundering since the passing of the Proceeds of Crime Act 2002, as well as new powers designed to address the seizure of suspected criminal property.

Equally as important the Act has also created new offences in relation to the facilitation of tax evasion which will affect all companies, LLPs and partnerships, such as lawyers.

A company or LLLP or partnership can now be held to account for the actions of its directors, employees and others businesses with which it might contractually engage (“Associated Persons”) in relation to a failure to prevent facilitation of tax evasion – not only in relation to UK tax but also in relation to foreign tax evasion offences.  

This includes any specific statutory tax evasion offence or the common law offence of cheating the public revenue. There must also be an element of fraud or deliberate dishonest conduct, so liability would not arise, for example, through failure or even a refusal to complete a tax return or breach of other similar notice requirement offences. There need not be a conviction for a tax evasion offence.

There is a defence. Liability will not arise if the Associated Persons “demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks” (ss.45(2) and 46(3) of the Act).

For liability to arise (according to the HMRC Practice Notes) there needs to be a deliberate and dishonest action to facilitate the evasion. This suggests that boa fide advice on, for example, a tax avoidance scheme, should not present a risk, though where the SRA has issued a warning notice about a particular arrangement, the line between potential liability under the Act and not, may prove, in my view, be less clear.  

Liability under the Act will not arise simply because a client is known to be committing tax evasion.  For the offence to be committed the adviser must be seen, as mentioned above, to be taking “deliberate and dishonest action” to facilitate the evasion. This would suggest that there is not a need to report a client for suspected tax evasion. Indeed, it is worth stressing that, since legal professional privilege applies to this offence no liability will arise for the firm under the Act if it fails to report tax evasion by the client where it knows that evasion is taking place.

Great care should however be exercised here, since if it is known the client is committing tax evasion and funds from that client are to be used say, to purchase a property, the tax evasion will mean the funds are criminally tainted, and to receive those funds into your client account would clearly amount to money laundering.  The tax evasion would clearly in these circumstances need to be reported to the NCA since failure to do so could constitute a criminal office under the anti-money laundering legislation.

The Act does not restrict the ability of a client to seek advice as to how legally to minimise tax liabilities.  It is to prevent the unlawful evasion of tax.  Thus, there is nothing to prevent a solicitor from defending criminal charges of tax evasion or providing advice to the client on how they may regularise their tax position through legal means. Similarly, a firm cannot be held to be liable if their advice to a client to cease tax evasion goes unheeded, though do keep in mind here your AML obligations.

So, what should we be doing to comply with the Act?

To begin with, there should be an immediate evaluation undertaken to assess the risk areas within the business.  In Conveyancing, the areas of risk center around tax advice on capital gains tax and stamp duty. The risk is heightened where the turnover of clients is high, and in offices where work is undertaken by individual case handlers rather than teams. If clients are referred on to outside advisors, for example to seek advice on Wills, this would also be viewed as a risk area. The HRMC Guidance notes are helpful in identifying both low and high-risk areas, and is a good starting point when putting together a risk assessment. Your AML risk assessment will also assist.

Once you have identified the areas of risk you can then look to form a policy on detection and prevention measures and controls.  How are staff vetted when they join?  Do you obtain references and carry out back ground checks? In my firm we undertake criminal background checks.   How do you carry ongoing monitoring and supervision of staff and third-party contractors?  Are files reviewed regularly?  Making sure there are good accounting protocols is a must.  How are transfers of money out of the office approved.  In this office no transfer is made without ensuring adequate source of funds and wealth checks are made and a director has paperwork to enable bank details can be checked before funds are sent out.  This helps to mitigate the risk of funds being transferred out to an account established by, for example, an employee.

One area of major risk of collusion is where the business acts for a family member or friend of an employee or the employee.  Stricter monitoring in these circumstances should be implemented, and a policy on who can work on those files should be formed and implemented.

As for third party contractors, make sure contracts are reviewed, that you formulate and issue a statement of your stance on tax evasion, and that you seek details of the business’s policy on the Act.  There is good argument to suggest that unless the contractor has a workable policy you should consider terminating the contract.

Putting together a policy is the first step.  Making sure you can demonstrate the implementation of the policy is the next step, and perhaps for establishing the defence to liability if required, is the most important one to take.  Organise staff training, create and maintain monitoring records, ask external file reviewers to include checks within the review.  Also review the risk assessment and policy regularly.

In short, do what you can to demonstrate that you are taking the obligations seriously, and that you are implementing adequate controls to detect signs of dishonesty within the work place.  Including a statement of your intent on your website and in your terms and conditions is also advisable.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Is a source of funds check a complete waste of time?

A controversial question, but one I must raise given information received today from Lloyds Banking Group to the effect that it is not their policy to pass on bank details of the person transferring funds into a client account, without the consent of the transferor. It seems that depending on the type of transfer only the sort code of the transferor’s bank is captured and made available. This is not the case on all transfers however.

The consequence of this apparent data protection issue, is that without this information it is impossible to carry out a full and complete source of funds check, and to fully comply with obligations imposed by anti-money laundering and counter terrorism legislation.

Take the following example.

Client A provides Solicitor Firm B with bank statements and other documents to enable source of wealth and source of funds to be undertaken.  These checks are made and details of the account or accounts from which funds are to be transferred are recorded by Solicitor Firm B.  Client A then makes the transfer of funds into Solicitor Firm B’s client account. How is it possible for Solicitor Firm B to complete with its regulatory and statutory obligations and complete the source of funds check when Solicitor Firm B’s bankers refuse to provide details of the transferor’s account? A client with criminal intentions could have provided Solicitor Firm B the bank statements from a legitimate account only to later use an account holding criminal tainted funds for the transfer. 

This example demonstrates in my view a massive hole in anti-money laundering and counter terrorism measures and makes a complete mockery of the hard work that many of us are undertaking to assist the enforcement agencies with their fight against crime.

I know Lloyds is looking into this, and has referred the concern to the SRA and their legal department to seek urgent guidance. It will be interesting to see what comes of this referral when it is clear that there a legal obligation placed on a bank to obtain details of the account from which a transfer is to be made. The question whether this information should be passed onto a regulated body to discharge a legal obligation to adhere to anti-money and anti-money laundering and counter terrorism legislation is less clear.

In the meantime, the absence of joined up writing on this aspect of effective detection will leave the whole of the legal and other sectors covered by the legislation completely exposed.  I have asked Lloyds if this now means it is safe to assume that if the money is coming through the UK banking system the risk of money laundering and terrorism funding is low. I suggest this as the situation currently stands only the Bank knows from where the money has originated.  I have also asked whether a warranty to that effect can be given! I am not, needless to say, expecting a positive reply! 

David Pett - Solicitor

Moving home in the snow

Moving house is a highly stressful event for most people, and even though most factors can be planned for weather is not one of them. As anyone moving in the last few days and in the coming week will be aware of, weather is unpredictable and often not considered fully.

If you are due to exchange contracts and the weather forecast is predicting adverse weather, the best approach is to delay matters.

Once you have exchanged contracts, you are contractually bound to move on the agreed completion date. In a property contract, unlike many commercial contracts, there is no provision that deals with unforeseen circumstances like the weather we've recently experienced.

You should be aware that if you are unable to move on the agreed date you could face penalties for being in breach of contract. The sensible approach therefore is to keep an eye on the forecast and wait until the weather has cleared, before committing yourself to an exchange.

So if you are unlucky enough to complete your property transaction during adverse weather conditions, here are a few helpful tips to keep in mind;

• Safety: this must always be at the forefront of your thoughts when making decisions about your move
• Be careful when packing: ensure to fully protect your temperature sensitive household goods such electrical items, delicate furniture, plants and animals, and any boxes are labelled 'keep dry'
• Prepare for the day: clear paths and driveways to your current property so that movers can safely access your property
• Protect: Limit damage to the flooring in both your current property and new home by using plastic sheeting and thick cardboard
• Be wise: Remember not to pack your warm winter clothing on moving day
• Make sure all utilities are connected, and you know how the heating and boiler operate in your new home
• Morale: Have equipment ready for making hot drinks for all your helpers
• Plan ahead: Have a back-up plan in case conditions worsen

Moving in any kind of adverse weather can take longer than anticipated, so keep calm and stay warm!

BEN PETT AND ANNA MCNEIL

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com