Earlier this year, the Solicitors Regulation Authority (SRA) revealed it had implemented disciplinary measures against several law firms who had allegedly committed money laundering breaches.
The authority stated it had carried out a review of 50 firms to test their compliance with tough new anti-money laundering regulations. Only around a third had carried out a mandatory risk assessment of their anti-money laundering procedures or were in the process of developing one. And in six of the practices, which ranged from City firms to high street solicitors, the SRA was concerned enough to engage in “ongoing disciplinary processes”.
Eight law firms have been shut over money laundering concerns in the past three years. Forty-nine solicitors were referred to the Solicitors Disciplinary Tribunal, resulting in 12 being struck off, the suspension of 13, and more than £800,000 in fines.
It is clear money laundering continues to be a major challenge for the legal profession.
Why are law firms so attractive to money launderers?
At the beginning of 2018, the UK government issued the second National Risk Assessment of money laundering and terrorist financing (NRA). Law firms were identified as high risk for money laundering activities but low risk for terrorist financing.
One reason the legal profession is seen as a prime target for money laundering activities is that firms dealing with high-value financial transactions are inherently respectable. The three areas identified as high risk by the NRA were:
- trust and company formation – this can be used to hide beneficial ownership
- conveyancing – property has long been used to hide ‘dirty money’, and has been particularly prevalent in the purchase of high-value real estate in London and Edinburgh
- the use of the client account – placing money in a solicitor’s client account can be used to add a layer of legitimacy to transactions
Complying with money laundering regulations is no easy task, which is why law firms are often seen as ‘soft’ targets. Solicitors must understand and comply with the duties and responsibilities contained in the:
- Proceeds of Crime Act 2002
- Terrorism Act 2000
- Money Laundering, Terrorist Financial and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) (which transposed the EU’s Fourth Anti-Money Laundering Directive into UK law)
The MLR 2017, among other directions, requires many law firms to appoint a Money Laundering Compliance Officer (MLCO). This is a new role in addition to the Money Laundering Reporting Officer (MLRO) and the person appointed must be a member of the Board of Directors (or its equivalent). One person can perform both roles and the MLCO must be registered with the SRA.
But even having all the required people in place to manage money laundering risks, preventing dirty money being circulated within your law firm requires ‘street smarts’ and the ability to spot certain red flags.
How to prevent money launderers targeting your law firm
The Law Society recently published an Anti-Money laundering Guidance which is helpful to ensure your law firm is in full compliance with the regulations. However, all staff need to be trained on how to spot the red flags of money laundering activity. Examples include:
- clients presenting unusually complex business structures which seem to have no commercial advantage
- difficulty in discovering the true beneficial owner of a business
- if your firm is being asked to set up a company and there is no other wider instruction, question why, as this process is relatively simple to do oneself
- in conveyancing transactions caution should be taken if property is being bought and sold in a short time-frame with no convincing explanation
- secretive third-party funding for a property or business deal
- funding being sourced at the last minute, preventing you from undertaking extensive due diligence checks
- clients placing funds in the client account and then dispensing with instructions for no good reason
Like cyber-criminals, money launderers keep getting smarter, finding new ways to circumvent due diligence and know-your-client checks. To protect your business, you need to review your anti-money laundering policies regularly and develop a culture of compliance within your law firm. Simply checking boxes will never be enough.
We have been helping legal professionals with professional disciplinary and regulatory hearings for over 20 years. If you have any questions relating to money-laundering compliance, please call us on 0151 909 2380 or complete our Free Online Enquiry and I will soon be in touch.