1.1 Who should read this practice note
All solicitors and other staff in a law firm who are involved in anti-money laundering compliance.
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1.2 What is the issue?
Solicitors are key professionals in the business and financial world, facilitating vital transactions that underpin the UK economy. As such, they have a significant role to play in ensuring their services are not used to further a criminal purpose. As professionals, solicitors must act with integrity and uphold the law, and they must not engage in criminal activity.
Money laundering and terrorist financing are serious threats to society, losing revenue and endangering life, and fuelling other criminal activity.
This practice note aims to assist solicitors in England and Wales to meet their obligations under the UK anti-money laundering and counter-terrorist financing (AML/CTF) regime.
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1.3 Definition of money laundering
Money laundering is generally defined as the process by which the proceeds of crime, and the true ownership of those proceeds, are changed so that the proceeds appear to come from a legitimate source. Under POCA, the definition is broader and more subtle. Money laundering can arise from small profits and savings from relatively minor crimes, such as regulatory breaches, minor tax evasion or benefit fraud. A deliberate attempt to obscure the ownership of illegitimate funds is not necessary.
There are three acknowledged phases to money laundering: placement, layering and integration. However, the broader definition of money laundering offences in POCA includes even passive possession of criminal property as money laundering.
1.3.1 Placement
Cash generated from crime is placed in the financial system. This is the point when proceeds of crime are most apparent and at risk of detection. Because banks and financial institutions have developed AML procedures, criminals look for other ways of placing cash within the financial system. You can be targeted because a solicitor's firm commonly deals with client money.
1.3.2 Layering
Once proceeds of crime are in the financial system, layering obscures their origins by passing the money through complex transactions. These often involve different entities like companies and trusts and can take place in multiple jurisdictions. You may be targeted at this stage and detection can be difficult.
1.3.3 Integration
Once the origin of the funds has been obscured, the criminal is able to make the funds reappear as legitimate funds or assets. They will invest funds in legitimate businesses or other forms of investment, often using you to buy a property, set up a trust, acquire a company, or even settle litigation, among other activities. This is the most difficult stage of money laundering to detect.
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1.4 Legal framework and other requirements
1.4.1 Financial Action Task Force (FATF)
This was created in 1989 by the G7 Paris summit, building on UN treaties on trafficking of illicit substances in 1988 and confiscating the proceeds of crime in 1990. In 1990, FATF released their 40 recommendations for fighting money laundering. Between October 2001 and October 2004 it released nine further special recommendations to prevent terrorist funding.
1.4.2 European Union directives
1991 - first money laundering directive
The European Commission issued this to comply with the FATF recommendations. It applied to financial institutions, and required member states to make money laundering a criminal offence. It was incorporated into UK law via the Criminal Justice Act 1991, the Drug Trafficking Act 1994 and the Money Laundering Regulations 1993.
2001 -second money laundering directive (PDF 122kb)
This incorporated the amendments to the FATF recommendations. It extended anti-money laundering obligations to a defined set of activities provided by a number of service professionals, such as independent legal professionals, accountants, auditors, tax advisers and real estate agents. It was incorporated into UK law via the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003.
2005 -third money laundering directive (PDF 302kb)
This extended due diligence measures to beneficial owners, recognising that such measures can be applied on a risk-based approach, and required enhanced due diligence to be undertaken in certain circumstances. It is incorporated into UK law by the Money Laundering Regulations 2007 and the Terrorism Act 2000 (Amendment) Regulations 2007 (TACT regulations 2007) and Proceeds of Crime Act 2002 (Amendment) Regulations 2007 (POCA regulations 2007) (the TACT Regulations 2007 and the POCA Regulations 2007).
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1.4.3 Proceeds of Crime Act 2002 (POCA)
Scope
POCA, as amended, establishes a number of money laundering offences including:
- principal money laundering offences
- offences of failing to report suspected money laundering
- offences of tipping off about a money laundering disclosure, tipping off about a money laundering investigation and prejudicing money laundering investigations
The TACT Regulations 2007 and the POCA Regulations 2007 repealed the s333 POCA tipping off offence. It has been replaced by section 333A which creates two new offences. S342(1) has also been amended to reflect these new offences. Read more about money laundering offences.
Application
POCA applies to all persons, although certain failure to report offences and the tipping off offences only apply to persons who are engaged in activities in the regulated sector.
The Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2007 amended the Proceeds of Crime Act 2002, changing the definition of the regulated sector to bring it into line with the Money Laundering Regulations 2007.
Under Schedule 9 of POCA, key activities which may be relevant to you are the provision by way of business, in one of the following ways:
- advice about the tax affairs of another person by a firm or sole practitioner
- legal or notarial services by a firm or sole practitioner involving the participation in financial or real property transactions concerning
- the buying and selling of real property or business entities
- the managing of client money, securities or other assets
- the opening or management of bank, savings or securities accounts
- the organisation of contributions necessary for the creation, operation or management of companies
- the creation, operation or management of trusts, companies or similar structures
Chapters 5, 6, and 8 of this practice note provide more details on your obligations under POCA.
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1.4.4 Terrorism Act 2000
Scope
The Terrorism Act 2000, as amended, establishes several offences about engaging in or facilitating terrorism, as well as raising or possessing funds for terrorist purposes. It establishes a list of proscribed organisations the Secretary of State believes are involved in terrorism. The TACT and POCA Regulations 2007 entered into force on 26 December 2007 and introduced tipping off offences and defences to the principal terrorist property offences into the Terrorism Act 2000.
Read about these provisions in Chapter 7
Application
The Terrorism Act applies to all persons. There is also a failure to disclose offence and tipping off offences for those operating within the regulated sector.
The Terrorism Act 2000 (Business in the Regulated Sector and Supervisory Authorities) Order 2007 amended the Terrorism Act, changing the definition of the regulated sector to bring it into line with the Money Laundering Regulations 2007.
Chapters 7 and 8 provide more detail on your obligations under the Terrorism Act.
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1.4.5 The Money Laundering Regulations 2007
Scope
The Money Laundering Regulations 2007 repeal and replace the Money Laundering Regulations 2003 and implement the third directive. They set administrative requirements for the anti-money laundering regime within the regulated sector and outline the scope of customer due diligence.
The regulations aim to limit the use of professional services for money laundering by requiring professionals to know their clients and monitor the use of their services by clients.
Copy of the regulations
Application
Regulation 3 states that the regulations apply to persons acting in the course of businesses carried on in the UK in the following areas:
- credit institutions
- financial institutions
- auditors, insolvency practitioners, external accountants and tax advisers
- independent legal professionals
- trust or company service providers
- estate agents
- high value dealers
- casinos
Independent legal professional
An independent legal professional includes a firm or a sole practitioner who by way of business provides legal or notarial services to other persons. It does not include solicitors employed by a public authority or working in-house.
The regulations only apply to certain solicitors' activities where there is a high risk of money laundering occurring. As such, they apply when solicitors participate in financial or real property transactions concerning:
- buying and selling of real property or business entities
- managing of client money, securities or other assets
- opening or management of bank, savings or securities accounts
- organisation of contributions necessary for the creation, operation or management of companies
- creation, operation or management of trusts, companies or similar structures
You will be participating in a transaction by assisting in the planning or execution of the transaction or otherwise acting for or on behalf of a client in the transaction.
Activities covered by the regulations
In terms of the activities covered, note that:
- managing client money is narrower than handling it
- opening or managing a bank account is wider than simply opening a solicitor's client account. It would be likely to cover solicitors acting as a trustee, attorney or a receiver
Activities not covered by the regulations
The Treasury has confirmed that the following would not generally be viewed as participation in financial transactions:
- preparing a home information pack or any document or information for inclusion in a HIP - it is specificlly excluded under Regulation 4(1)(f)
- payment on account of costs to a solicitor or payment of a solicitor's bill
- provision of legal advice
- participation in litigation or a form of alternative dispute resolution
- will-writing, although you should consider whether any accompanying taxation advice is covered
- work funded by the Legal Services Commission.
If you are uncertain whether the regulations apply to your work, seek legal advice on the individual circumstances of your practice or simply take the broadest of the possible approaches to compliance with the regulations.
Working elsewhere in the regulated sector
When deciding whether you are within the regulated sector for the purpose of the regulations, you also need to consider whether you offer services bringing you within the definitions of a tax adviser, insolvency practitioner, or trust or company service provider. You must also consider the full range of related services, such as tax planning and tax compliance work.
You will also need to consider whether your firm undertakes activities falling within the definition of financial institution, particularly with respect to the list of operations covered by the banking consolidation directive, as contained in schedule 1 of the regulations. When considering those operations, you should note that a will is not a designated investment, so storing it is not a safe custody service, and is not covered by the regulations.
Simply being nominated as a trustee under a will does not amount to being a trust and company service provider, because the trust is not formed until the testator's death.
If you are an independent legal professional within the regulated sector and you also fall within an another category, such as work regulated by FSA, this may affect your supervision under these regulations. You should contact the SRA for advice on any supervisory arrangements that they may have in place with other supervisory authorities.
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1.5 Status of this practice note
This practice note replaces previous Law Society guidance and good practice information on complying with AML/CTF obligations.
The purpose of this practice note is to:
- outline the legal and regulatory framework of AML/CTF obligations for solicitors within the UK
- outline good practice on implementing the legal requirements
- outline good practice in developing systems and controls to prevent solicitors being used to facilitate money laundering and terrorist financing
- provide direction on applying the risk-based approach to compliance effectively
The Solicitors Regulation Authority (SRA) will take into account whether a solicitor has complied with this practice note when undertaking its role as regulator of professional conduct, and as a supervisory authority for the purposes of the regulations. This practice note is not mandatory but a solicitor may be asked by the SRA to justify a decision to deviate from it.
Some solicitors' firms are authorised and regulated by the FSA because they are involved in mainstream regulated activities, eg advising clients directly on investments such as stocks and shares. Those firms should also consider the Joint Money Laundering Steering Group's guidance.
This practice note is not a substitute for the law, and compliance with it, is not a defence to offences under POCA, the Terrorism Act or the regulations. However, courts will generally have regard to any good practice on a particular topic issued by a professional body when considering the standard of a professional's conduct and whether they acted reasonably, honestly and appropriately.
We have obtained approval from HM Treasury for this practice note. In accordance with sections 330(8) and 331(7) of the Proceeds of Crime Act 2002, section 21A(6) of the Terrorism Act 2000, and regulation 45(2) of the Money Laundering Regulations 2007, the court is required to consider compliance with its contents in assessing whether a person committed an offence or took all reasonable steps and exercised all due diligence to avoid committing the offence.
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1.6 Terminology in this practice note
Must- A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view.
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May- A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
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1.7 Other information and products
1.7.1 Law Society services
1.7.2 Other
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1.8 Acknowledgements
Many have had input into the preparation of this practice note. The members of the Money Laundering Task Force and others mentioned below deserve particular acknowledgement for both the time and energy they have committed to the development of the guidance.
Task force
| Robin Booth | BCL Burton Copeland |
| Alison Matthews | Irwin Mitchell |
| Christopher Murray | Kingsley Napley |
| Peter Burrell | Herbert Smith |
| Stephen Gentle | Kingsley Napley |
| Nicola Boulton | Byrne and Partners |
| Louise Delahunty | Simmons and Simmons |
| Nick Cray | Lovells |
| Peter Rodd | Boys and Maugham |
| Chris McNeil | Freshfields Bruckhaus Deringer |
Law Society staff
| Che Odlum | Policy Adviser |
| Emma Oettinger | Policy Adviser |
| James Richards | E-communications Manager |
Others
| Richard Bark-Jones | Morecrofts |
| Daren Allen | DLA Piper |
| Sarah de Gay | Slaughter and May |
| Clive Cutbill | Withers |
| Johanna Waritay | Clifford Chance |
| Suzie Ogilvey | Linklaters |
| Elizabeth Richards | SRA |
The Law Society would also like to specifically thank the following people for the generous provision of their time and expertise in assisting the Law Society with its campaign to ensure that the requirements regarding identification of beneficial owners were sufficiently clear and workable:
| Richard Bark-Jones | Morecrofts |
| Toby Graham | Farrer & Co |
| Rabinder Singh QC | Matrix Chambers |
| Alex Balin | Matrix Chambers |
| Michael Furness QC | Wilberforce Chambers |
| Nicholas Le Poidevin | Lincolns Inn |
| Nicholas Green QC | Brick Court Chambers |
| Martyn Frost | STEP |
| Keith Johnston | STEP |
| Jacob Rigg | STEP |
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