In one telling scene from the opening episode of the BBC’s McMafia, Alex Godman, played by James McNorton, is asked how he might send funds to Mumbai “without leaving a trace”. His answer: by setting up an elaborate chain of companies in different tax havens. A “special purpose vehicle” in the Caymans would lend money to another similar vehicle in the Bahamas. And so on. This is classic money laundering. It may sound like fiction. However, it’s real. And unwitting law firms often are used as conduits to enable the flow of dirty money.
According to Financial Conduct Authority, up to £57 billion is laundered through the UK every year . Many solicitors associate money-laundering solely with property conveyancing, but criminal networks have spread their tentacles wider, such that even litigation departments have become targets.
An example of how a sham litigation money laundering transaction works
A new client will contact a law firm’s litigation department. They will be from an overseas jurisdiction. Via email, they may say something along the lines of, “we have a dispute with a business based not far from you and we need to enter into litigation – we would like you to act for us”.
The firm will run an initial money-laundering check and it will come back clean. The client will then ask the firm to send their terms of engagement as soon as possible. The terms are agreed, and the client will transfer a sum of money to cover any upfront ‘expenses’.
A week or so later, the client will email to say the dispute has been settled out of court. Although you will not have done any work for the client, a small fee for the initial time spent on the matter is deducted and the balance is asked to be sent back to the client. This is of course, ‘cleaned money’.
Steps law firms can take to prevent money laundering
The SRA is fiercely determined to crack down on law firms who do not take adequate precautions against money laundering. In October 2016, renowned sports lawyer, Mel Goldberg, was struck off, despite his 50 years of experience. The Solicitors Disciplinary Tribunal (SDT) banned him after finding he acted for clients in a transaction that bore the hallmarks of money laundering and/or fraud. According to a report in the Law Society Gazette, Mr Goldberg “used the client account of his firm inappropriately by using it as a banking facility, failing to comply with money-laundering regulations and acting in transactions where there was a conflict of interest. The tribunal found dishonesty was not involved in any of these allegations .”
To prevent money laundering, the SRA states law firms should take the following precautions:
- where possible, meet the client in person to verify their ID
- if you cannot meet the client in person, use additional methods to ensure their ID is genuine
- only using the client account to hold client funds for a legal transaction, in accordance with rule 14.5 of the SRA Accounts Rules 2011
- take extra precautionary measures if a client wants to perform a large cash transaction
- provide the firm’s Money Laundering Reporting Officer with the seniority to encourage reporting of suspicious activity
- ensure all members of the firm receive regular, updated training on money-laundering, including providing a list of high-risk countries
- submit Suspicious Activity Reports (SARs) that adhere to the best practice set out by the NCA, ensuring they are not vague or inaccurate
To avoid the risk of money-laundering, proper due-diligence needs to be undertaken for every new client. Trusting your instincts is vital when it comes to spotting red-flags which could indicate an illicit attempt at money-laundering activity. If a client fails to produce a valid ID or funds appear to come from a suspicious source, make further investigations.
The consequences of being snarled up in money laundering (even inadvertently) are serious. A law firm can suffer irreparable damage to its reputation, an increase in the cost of insurance and be suspended or struck off by the SDT. And of course, as the activity is illegal, there could be sanctions including prison sentences.
By putting well-documented money-laundering policies and procedures in place, and ensuring your entire firm understands the signs which may indicate money laundering activity, your firm will keep itself on the right side of the SRA.
We have been helping legal professionals with professional disciplinary and regulatory hearings for over 20 years. If you have any questions relating to anti-money laundering compliance, please call us on 0151 909 2380 or complete our Free Online Enquiry and I will soon be in touch.