Contents
11.1 General comments
The Money Laundering Regulations 2007 require you to conduct ongoing monitoring of your business relationships and take steps to be aware of transactions with heightened money laundering or counter-terrorist financing risks.
The Proceeds of Crime Act 2002 requires you to report suspicious transactions.
This chapter highlights a number of warning signs for solicitors generally and for those working in specific sectors, to help you decide whether you have reasons for concern or the basis for a disclosable suspicion.
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11.2 General warning signs
Because money launderers are always developing new techniques, no list of examples can be fully comprehensive; however, here are some key factors which may heighten a client's risk profile or give you cause for concern.
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11.2.1 Secretive clients
While face-to-face contact with clients is not always necessary, an excessively obstructive or secretive client may be a cause for concern.
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11.2.2 Unusual instructions
Instructions that are unusual in themselves, or that are unusual for your firm or your client, may give rise to a cause for concern.
Instructions outside your firm's area of expertise
Taking on work which is outside your firm's normal range of expertise can be risky because money launderers might use such firms to avoid answering too many questions. An inexperienced solicitor might be influenced into taking steps which a more experienced solicitor would not contemplate. Be wary of instructions in niche areas of work in which your firm has no background, but in which the client claims to be an expert.
If your client is based a long way from your offices, consider why you have been instructed. For example, have your services been recommended by another client or is the matter based near your firm? Making these types of enquiries makes good business sense as well as being a sensible anti-money laundering check.
Changing instructions
Instructions or cases that change unexpectedly might be suspicious, especially if there seems to be no logical reason for the changes.
The following situations could give rise to a cause for concern. Consider the Solicitors' Accounts Rules if appropriate.
- a client deposits funds into your client account but then ends the transaction for no apparent reason
- a client tells you that funds are coming from one source and at the last minute the source changes
- a client unexpectedly asks you to send money received into your client account back to its source, to the client or to a third party
Unusual retainers
Be wary of:
- disputes which are settled too easily as this may indicate sham litigation
- loss-making transactions where the loss is avoidable
- dealing with money or property where you suspect that either is being transferred to avoid the attention of a trustee in a bankruptcy case, HMRC, or a law enforcement agency
- settlements paid in cash, or paid directly between parties – for example, if cash is passed directly between sellers and buyers without adequate explanation, it is possible that mortgage fraud or tax evasion is taking place
- complex or unusually large transactions
- unusual patterns of transactions which have no apparent economic purpose
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11.2.3 Use of client accounts
Only use client accounts to hold client money for legitimate transactions for clients, or for another proper legal purpose. Putting dirty money through a solicitor's client account can clean it, whether the money is sent back to the client, on to a third party, or invested in some way. Introducing cash into a banking system can become part of the placement stage of money laundering. Therefore, the use of cash may be a warning sign.
Solicitors should not provide a banking service for their clients. However, it can be difficult to draw a distinction between holding client money for a legitimate transaction and acting more like a bank.
For example, when the proceeds of a sale are left with your firm to make payments, these payments may be to mainstream loan companies, but they may also be to more obscure recipients, including private individuals, whose identity is difficult or impossible to check.
Establish a policy on handling cash
Large payments made in actual cash may also be a sign of money laundering. It is good practice to establish a policy of not accepting cash payments above a certain limit either at your office or into your bank account.
Clients may attempt to circumvent such a policy by depositing cash directly into your client account at a bank. You may consider advising clients in such circumstances that they might encounter a delay in completion of the final transaction. Avoid disclosing your client account details as far as possible and make it clear that electronic transfer of funds is expected.
If a cash deposit is received, you will need to consider whether you think there is a risk of money laundering taking place and whether it is a circumstance requiring a disclosure to SOCA.
Source of funds
Accounts staff should monitor whether funds received from clients are from credible sources. For example, it is reasonable for monies to be received from a company if your client is a director of that company and has the authority to use company money for the transaction.
However, if funding is from a source other than your client, you may need to make further enquiries, especially if the client has not told you what they intend to do with the funds before depositing them into your account. If you decide to accept funds from a third party, perhaps because time is short, ask how and why the third party is helping with the funding.
You do not have to make enquiries into every source of funding from other parties. However, you must always be alert to warning signs and in some cases you will need to get more information.
In some circumstances, cleared funds will be essential for transactions and clients may want to provide cash to meet a completion deadline. Assess the risk in these cases and ask questions if necessary.
Disclosing client account details
Think carefully before you disclose your client account details. They allow money to be deposited into your accounts without your knowledge. If you need to provide your account details, ask the client where the funds will be coming from. Will it be an account in their name, from the UK or abroad? Consider whether you are prepared to accept funds from any source that you are concerned about.
Keep the circulation of client account details to a minimum. Discourage clients from passing the details on to third parties and ask them to use the account details only for previously agreed purposes.
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11.2.4 Suspect territory
While there are no longer any countries currently listed on the FATF non co-operative and compliant territories list, this does not mean that all have anti-money laundering standards equivalent to those in the UK .
Retainers involving countries which do not have comparative money laundering standards may increase the risk profile of the retainer.
Consider whether extra precautions should be taken when dealing with funds or clients from a particular jurisdiction. This is especially important if the client or funds come from a jurisdiction where the production of drugs, drug trafficking, terrorism or corruption is prevalent.
The Financial Action Taskforce and HM Treasury regularly provide statements on unsatisfactory money laundering controls in overseas jurisdictions. Read the latest statement.
You should undertake enhanced due diligence and ongoing monitoring with respect to these countries.
The International Bar Association provides a summary of money laundering legislation around the world.
Transparency International provides a corruption perception index which may help when you are considering dealing with clients from other countries.
You can also check whether your client is a proscribed person on the HM Treasury's consolidated list.
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11.3 Private client work
11.3.1 Administration of estates
The administration of estates is a regulated activity. A deceased person's estate is very unlikely to be actively utilised by criminals as a means for laundering their funds; however, there is still a low risk of money laundering for those working in this area.
Source of funds
When you are acting either as an executor, or for executors, there is no blanket requirement that you should be satisfied about the history of all of the funds which make up the estate under administration; however you should be aware of the factors which can increase money laundering risks.
Consider the following when administering an estate:
- where estate assets have been earned in a foreign jurisdiction, be aware of the wide definition of criminal conduct in POCA and the provisions relating to overseas criminal conduct
- where estate assets have been earned or are located in a suspect territory, you may need to make further checks about the source of those funds
The wide nature of the offences of 'acquisition, use and possession' in section 329 of POCA may lead to a money laundering offence being committed at an early point in the administration. The section 328 offence may also be relevant.
Be alert from the outset and monitor throughout so that any disclosure can be considered as soon as knowledge or suspicion is formed and problems of delayed consent are avoided. A key benefit of the Bowman v Fels judgment is that a solicitor who makes a disclosure is now able to continue work on the matter, so long as they do not transfer funds or take any other irrevocable step.
How the estate may include criminal property
An extreme example would be where you know or suspect that the deceased person was accused or convicted of acquisitive criminal conduct during their lifetime.
If you know or suspect that the deceased person improperly claimed welfare benefits or had evaded the due payment of tax during their lifetime, criminal property will be included in the estate and so a money laundering disclosure may be required. Information on the financial thresholds for benefits can be obtained from the Department for Work and Pensions or the HMRC website.
While administering an estate, you may discover or suspect that beneficiaries are not intending to pay the correct amount of tax or are avoiding some other financial charge (for example, by failing to disclose gifts received from the deceased less than seven years before death). Although these matters may not actually constitute money laundering (because no criminal conduct has yet occurred so there is no 'criminal property'), you should carefully consider their position in conduct terms with respect to principle 1 of the SRA Handbook.
Grant of probate
A UK grant of probate may be required before UK assets can be released, while for overseas assets the relevant local laws will apply. Remain alert to warning signs, for example if the deceased or their business interests are based in a suspect territory.
If the deceased person is from another jurisdiction and a lawyer is dealing with the matter in the home country, it may be helpful to ask that person for information about the deceased to gain some assurances that there are no suspicious circumstances surrounding the estate. The issue of the tax payable on the estate may depend on the jurisdiction concerned.
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11.3.2 Trusts
Trust work is a regulated activity.
Trusts can be used as a money laundering vehicle. The key risk period for trusts is when the trust is set up, as if the funds going into the trust are clean, it is only by the trustees using them for criminal purposes that they may form the proceeds of crime.
When setting up a trust, be aware of general money laundering warning signs and consider whether the purpose of the trust could be to launder criminal property. Information about the purpose of the trust, including why any unusual structure or jurisdiction has been used, can help allay concerns. Similarly information about the provider of the funds and those who have control of the funds, as required by the Money Laundering Regulations 2007, will assist.
Whether you act as a trustee yourself, or for trustees, the nature of the work may already require information which will help in assessing money laundering risks, such as the location of assets and the identity of trustees. Again, any involvement of a suspect jurisdiction, especially those with strict bank secrecy and confidentiality rules, or without similar money laundering procedures, may increase the risk profile of the retainer.
If you think a money laundering offence has, or may have, been committed that relates to money or property which already forms part of the trust property, or is intended to do so, consider whether your instructions involve you in a section 328 arrangement offence. If they do, consider the options for making a disclosure.
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11.3.3 Charities
In common with trusts, while the majority of charities are used for legitimate reasons, they can be used as money laundering/terrorist financing vehicles.
If you are acting for a charity, consider its purpose and the organisations it is aligned with. If you are receiving money on the charity's behalf from an individual or a company donor, or a bequest from an estate, be alert to unusual circumstances including large sums of money.
There is growing concern about the use of charities for terrorist funding. HM Treasury maintains a consolidated list of individuals and entities to whom you may not provide funds, economic resources, and in relation to terrorism, finacial services. See also 7.10 of this practice note.
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11.3.4 Powers of attorney/deputyship
Whether acting as, or on behalf of, an attorney or deputy, you should remain alert to money laundering risks.
If you are acting as an attorney you may learn financial information about the donor relating, for example, to non-payment of tax or wrongful receipt of benefits. You will need to consider whether to make a disclosure to SOCA.
Where the public guardian has an interest – because of a deputyship or registered enduring power of attorney – consider whether the Office of the Public Guardian (OPG) needs to be informed. Informing the OPG is unlikely to be tipping off because it is unlikely to prejudice an investigation.
If you discover or suspect that a donee has already completed an improper financial transaction that may amount to a money laundering suspicion, a disclosure to SOCA may be required (depending on whether legal professional privilege applies). However, it may be difficult to decide whether you have a suspicion if the background to the information is a family dispute. You can get legal advice on this through the Law Society's AML directory.
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11.4 Property work
11.4.1 Ownership issues
Properties owned by nominee companies or multiple owners may be used as money laundering vehicles to disguise the true owner and/or confuse the audit trail.
Be alert to sudden or unexplained changes in ownership. One form of laundering, known as flipping, involves a property purchase, often using someone else's identity. The property is then quickly sold for a much higher price to the same buyer using another identity. The proceeds of crime are mixed with mortgage funds for the purchase. This process may be repeated several times.
Another potential cause for concern is where a third party is providing the funding for a purchase, but the property is being registered in someone else's name. There may be legitimate reasons for this, such as a family arrangement, but you should be alert to the possibility of being misled about the true ownership of the property. You may wish to undertake further CDD measures on the person providing the funding.
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11.4.2 Methods of funding
Many properties are bought with a combination of deposit, mortgage and/or equity from a current property. Usually, as a solicitor, you will have information about how your client intends to fund the transaction, and will expect to be updated if those details change, for example if a mortgage falls through and new funding is obtained.
This is a sensible risk assessment measure which should help you decide whether you need to know more about the transaction.
Private funding
Usually purchase funds comprise some private funding, with the majority of the purchase price being provided via a mortgage. Transactions that do not involve a mortgage have a higher risk of being fraudulent.
Look out for:
- large payments from private funds, especially if your client has a low income
- payments from a number of individuals or sources
If you are concerned:
- ask your client to explain the source of the funds. Assess whether you think their explanation is valid – for example, the money may have been received from an inheritance or from the sale of another property
- consider whether the beneficial owners were involved in the transaction
Remember that payments made through the mainstream banking system are not guaranteed to be clean.
Funds from a third party
Third parties often assist with purchases, for example relatives often assist first time home buyers. You may be asked to receive funds directly from those third parties. You will need to decide whether, and to what extent, you need to undertake any CDD measures in relation to the third parties.
Consider whether there are any obvious warning signs and what you know about:
- your client
- the third party
- their relationship
- the proportion of the funding being provided by the third party
Consider your obligations to the lender in these circumstances – you are normally required to advise lenders if the buyers are not funding the balance of the price from their own resources.
Direct payments between buyers and sellers
You may discover or suspect that cash has changed hands directly, between a seller and a buyer, for example at a rural auction.
If you are asked to bank the cash in your client account, this presents a problem because the source of the cash is not your client and so checks on the source of the funding can be more difficult. The auction house may be able to assist because of checks they must make under the regulations. However, you may decide to decline the request.
If you suspect that there has been a direct payment between a seller and a buyer, consider whether there are any reasons for concern (for example, an attempt to involve you in tax evasion) or whether the documentation will include the true purchase price.
A client may tell you that money is changing hands directly when this is not the case. This could be to encourage a mortgage lender to lend more than they would otherwise, because they believe that private funds will contribute to the purchase. In this situation, consider your duties to the lender.
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11.4.3 Valuing
An unusual sale price can be an indicator of money laundering. While you are not required to get independent valuations, if you become aware of a significant discrepancy between the sale price and what you would reasonably expect such a property to sell for, consider asking more questions.
Properties may also be sold below the market value to an associate, with a view to obscuring the title to the property while the original owner still maintains beneficial ownership.
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11.4.4 Lender issues
You may discover or suspect that a client is attempting to mislead a lender client to improperly inflate a mortgage advance – for example, by misrepresenting the borrower's income or because the seller and buyer are conspiring to overstate the sale price. Transactions which are not at arms length may warrant particularly close consideration.
However, until the improperly obtained mortgage advance is received there is not any criminal property for the purposes of disclosure obligations under POCA.
If you suspect that your client is making a misrepresentation to a mortgagee you must either dissuade them from doing so or consider the ethical implications of continuing with the retainer. Even if you no longer act for the client you may still be under a duty to advise the mortgage company.
If you discover or suspect that a mortgage advance has already been improperly obtained, consider advising the mortgage lender.
See chapter 5 of the Mortgage fraud practice note.
If you are acting in a re-mortgage and discover or suspect that a previous mortgage has been improperly obtained, you may need to advise the lender, especially if the re-mortgage is with the same lender. You may also need to consider making a disclosure to SOCA as there is criminal property (the improperly obtained mortgage advance).
Legal professional privilege
If your client has made a deliberate misrepresentation on their mortgage application you should consider whether the the crime/fraud exemption to legal professional privilege will apply, so that no waiver to confidentiality will be needed before a disclosure is made.
However, you will need to consider matters on a case-by-case basis and if necessary, seek legal advice, possibly by contacting a solicitor in the AML directory.
Tipping off offences
You may be concerned that speaking to the lender client conflicts with tipping off offences. A key element of these offences is the likelihood of prejudicing an investigation. This may be a small risk when making disclosures to reputable lenders, and if the lender is your client the legal professional privilege exemption may apply to such a disclosure.
A key element of these offences is the likelihood of prejudicing an investigation. The risk of this is small when disclosing to a reputable lender or your insurer. The financial services sector are also regulated for the purposes of anti-money laundering and subject to the same obligations. There is also a specific defence of making a disclosure for the purposes of preventing a money laundering offence.
In relation to asking further questions of your client and discussing the implications of the Proceeds of Crime Act 2002, there is a specific defence for tipping off for legal advisers who are seeking to dissuade their client from engaging in a money laundering offence.
For further advice on tipping off, see chapter 5.8.
For further information about avoiding tipping off in a particular case, contact SOCA's Financial Intelligence Helpdesk on 020 7238 8282.
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11.4.5 Tax issues
Tax evasion of any type, whether committed by your client or the other party to a transaction, can result in you committing a section 328 arrangements offence.
Abuse of the Stamp Duty Tax procedure may also have money laundering implications, for example if the purchase price is recorded incorrectly.
If a client gives you instructions which offend the Stamp Duty Land Tax procedure, you must consider your position under principle 1 of the SRA Handbook. If you discover the evasion after it has occurred, you are obliged to make a disclosure, subject to any legal professional privilege.
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11.5 Company and commercial work
The nature of company structures can make them attractive to money launderers because it is possible to obscure true ownership and protect assets for relatively little expense. For this reason solicitors working with companies and in commercial transactions should remain alert throughout their retainers, with existing as well as new clients.
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If you work on the formation of a new company, be alert to any signs that it might be misused for money laundering or terrorist financing.
If the company is being formed in a foreign jurisdiction, it may be helpful to clarify why this is the case. In countries where there are few anti-money laundering requirements, you should make particularly careful checks.
If you are in doubt, it may be better to refuse the retainer.
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11.5.2 Holding of funds
If you wish to hold funds as stakeholder or escrow agent in commercial transactions, consider the checks you wish to make about the funds you intend to hold, before the funds are received and whether it would be appropriate to conduct CDD measures on all those on whose behalf you are holding funds.
Consider any proposal that you collect funds from a number of individuals, whether for investment purposes or otherwise. This could lead to wide circulation of your client account details and payments being received from unknown sources.
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11.5.3 Private equity
Law firms could be involved in any of the following circumstances:
- the start-up phase of a private equity business where individuals or companies seek to establish a private equity firm (and in certain cases, become authorised to conduct investment business)
- the formation of a private equity fund
- ongoing legal issues relating to a private equity fund
- execution of transactions on behalf of a member of a private equity firm's group of companies, (a private equity sponsor), that will normally involve a vehicle company acting on its behalf, (newco).
Who is the client?
Start-up phase
In this phase, as you will be approached by individuals or a company seeking to become established (and in certain cases authorised) your client would be the individuals or company and you would therefore conduct CDD accordingly.
Formation of private equity funds
Your client is likely to be the private equity sponsor or it may be an independent sponsor.
You will rarely, if ever, be advising the fund itself and, unless you are instructed directly by an investor, you will not be considered to be advising the investors in the fund.
You should therefore identify who your client is and apply the CDD measures according to their client type as set out in 4.6.
Where the client is a newco, you will need to obtain documentation evidencing the establishment of the newco and consider the issue of beneficial ownership.
Generally private equity work will be considered at low risk of money laundering or terrorist financing for the following reasons:
- private equity firms in the UK are also covered by the Regulations as a financial institution and they are regulated by the FSA
- investors in private equity funds are generally large institutions, some of which will also be regulated for money laundering purposes. They will have long established relationships with the private equity firm, usually resulting in a well-known investor base
- where the private equity sponsor or fund manager is regulated in the UK, EEA or a comparable jurisdictions, it is likely to have followed CDD processes prior to investors being accepted
- the investment is generally illiquid and the return of capital is unpredictable
- the terms of the fund documentation generally strictly control the transfer of interests and the return of funds to investors
Factors which may alter this risk assessment include:
- where the private equity sponsor or an investor is located in a jurisdiction which is not regulated for money laundering to a standard which is equivalent to the third directive
- where the investor is either an individual or an investment vehicle itself (a private equity fund of funds)
- where the private equity sponsor is seeking to raise funds for the first time
JMLSG has prepared detailed advice on CDD measures for private equity businesses in Part II of its guidance, which you may wish to consider.
The following points should be considered when undertaking CDD measures in relation to private equity work:
- where your client qualifies for simplified due diligence you do not have to identify beneficial owners unless there is a suspicion of money laundering
- where simplified due diligence does not apply you need to consider the business structure of the client and conduct CDD on the client in accordance with that structure
- where there is an appropriately regulated professional closely involved with the client who has detailed knowledge of the beneficial owners of the client, you may consider relying on them in accordance with Regulation 17
- whether an unregulated private entity firm, fund manager or other person involved with the transaction is an appropriate source of information regarding beneficial ownership of the client should be determined on a risk-sensitive basis, issues to consider include:
- the profile of the private equity sponsor, fund manager, (if different), or such other person
- their track record within the private equity sector
- their willingness to explain identification procedures and provide confirmation that all beneficial owners have been identified
- where you are using another person as an information source for beneficial owners, where there are no beneficial owners within the meaning of Regulation 6, the source may simply confirm their actual knowledge of this, or if beneficial owners do exist, the source should provide you with the identifying details of the beneficial owner or an assurance that the beneficial owners have been identified and that the details will be provided on request.
- where there is a tiered structure, such as a feeder fund or fund of funds structure, you must identify the beneficial owner but you may decide having made enquiries that no such beneficial owners exist even though you have got to the top of the structure.
- where it is envisaged that you will be acting for a newco which is to be utilised at a future point in a flotation or acquisition, it is only once they are established and signed up as a party to the transaction that you need to commence CDD measures on the newco. However once you start acting for a newco, you will need to consider identification for it, and its beneficial owner. You may therefore wish to commence the process of identifying any beneficial owner in advance.
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11.5.4 Collective investment schemes
Undertaking work in relation to retainers involving collective investment schemes may pose similar problems when undertaking CDD as for private equity work.
The risk factors with respect to a collective investment scheme will be decreased where:
- the scheme is only open to tax exempt institutional investors
- investment managers are regulated individuals or entities
- a prospectus is issued to invite investment
Factors which will increase the risks include where:
- the scheme is open to non-tax exempt investors
- the scheme or its investors are located in a jurisdiction which is not regulated for money laundering to a standard which is equivalent to the third directive
- neither the scheme nor the investment managers are regulated and do not conduct CDD on the investors
JMLSG have also issued guidance which touches on the area of collective investment schemes, which you may wish to have regard to.
In addition to the points to consider outlined for private equity work, where a collective investment scheme has issued a prospectus it is advisable to review a copy of the prospectus to understand the intended structure of the investment scheme.
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