If you would not accept a bag full of cash from a client with respect to a transaction, why is it acceptable to provide them with your client account details so that they can deposit it there themselves?
This is the question which the
law enforcement
has been asking over recent months as they review a number of investigations into suspect property purchases.
Cash is legal tender in the UK , but large amounts of cash is a warning sign that the holder of that cash may be engaged in money laundering.
Under the Money Laundering Regulations 2007, you are required to take adequate measures to establish the source of funds and to ensure that the transaction is consistent with your knowledge of client.
Where the source of funds is not consistent or otherwise gives rise to a suspicion of money laundering, you must consider making a report to the Serious Organised Crime Agency (SOCA).
Establishing the source of funds does not just mean asking for the money to come from a bank account in the client's name. It focuses more on understanding how the client can legitimately fund the transaction.
A practical example
A first year university student instructs you in the purchase of an apartment. They have £250,000 in private funding available for the purchase.
Whether or not those funds are in a bank account, this would usually be considered a significant sum of private funding for a person in those circumstances to have.
Explanations such as:
- the existence of a significant trust fund
- winning the lottery, or
- having stated a hugely successful internet company while still in high school;
when supported by appropriate documentation, may assist in understanding the risk of the client and establishing the source of funds so that you do not have a suspicion that they are illicit.
Without a credible explanation of the source of these funds, the possibility that the client is money laundering becomes less fanciful and more likely, reportable.
In such circumstances, whether the client provides you with the cash in your office, deposits
the cash directly
into your client account or deposits it into another account and transfers it to your account, you would still have concerns as to where and how they obtained this amount of private funding.
But what about the banks?
Some firms have suggested that as long as the money is put into the bank, it is the bank's responsibility to make a report to SOCA and the law firm does not have to worry about it anymore.
While the bank may very well make a suspicious activity report, in doing so they will mention the name of the law firm who received the funds.
This may result in delays later in the transaction for the client due to the bank awaiting consent to pay funds away and it may also result in the police obtaining a production order on your files.
If you as a solicitor think the depositing of cash in the particular case would be suspicious enough for the bank to make a report, it is a valid question for the police to ask why you then did not think it was suspicious enough to make a report yourself.
How to protect your firm
It is good practice to have a cash acceptance policy to mitigate insurance risks, risk to your staff when they carry large amounts of cash to the bank and to provide a clear signal to clients that you will not accept being used for money laundering.
You should also:
- be careful who you give your account details to
- request that all funds are transferred electronically as this helps provide an audit trail
- ask your accounts staff to monitor your bank statements for any cash payments into your client account
- match cash payments to retainers and review the retainer in light of the risks posed by the cash payment
- encourage your fee earners to ask questions about the client, about the purpose and nature of the retainer, including the source of funds
- consider whether the explanations for the existence of large amounts of cash or private funding are credible and if not, consider your obligations under the Proceeds of Crime Act