Anti-money laundering
Chapter 1 – introduction
1.1General comments
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 are obligated to act with integrity, uphold the law, and to 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 to meet their obligations under the UK anti-money laundering and counter-terrorist financing (AML/CTF) regime.
1.2Status 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 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.
This practice note is not a substitute for the law and compliance with it is not of itself 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 are seeking Treasury approval of this practice note, which, in accordance with Regulation 45(2), will require the court 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.
1.3Definition 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.
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1.3.1Placement
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.
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1.3.2Layering
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.
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1.3.3Integration
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.
1.4Legal framework
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1.4.1Financial 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.
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1.4.2European Union directives
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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.
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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.
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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.
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1.4.3Proceeds of Crime Act 2002 (POCA)
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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 and prejudicing money laundering investigations
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Application
POCA applies to all persons, although certain 'failure to report offences' only apply to persons who are engaged in activities in the regulated sector. The definition of the regulated sector varies slightly between Schedule 9 of POCA and the Money Laundering Regulations 2007.
The Schedule 9 definition regulates according to activities, not professions, similarly to the Money Laundering Regulations 2003.
Under Schedule 9 of POCA, key activities which may be relevant to you are the provision by way of business of:
- advice about the tax affairs of another person by a body corporate or un-incorporate or, in the case of a sole practitioner, by an individual
- legal services by a body corporate or un-incorporate or, in the case of a sole practitioner, by an individual, which involve participation in a financial or real property transaction (whether by assisting in the planning or execution of any such transaction or otherwise by acting for, or on behalf of, a client in any such transaction)
- services in relation to the formation, operation or management of a company or trust
Chapters 5, 6, and 8 of this practice note provide more details on your obligations under POCA.
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1.4.4Terrorism Act 2000
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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.
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Application
The Terrorism Act applies to all persons. There is also a failure to disclose offence for those operating within the regulated sector. The regulated sector is again defined differently to that under either POCA or the Regulations. View the definition of the regulated sector in the Anti-Terrorism, Crime and Security Act 2001,
Chapters 7 and 8 provide more detail on your obligations under the Terrorism Act.
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1.4.5The Money Laundering Regulations 2007
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Scope
These enter into force on 15 December 2007, repealing and replacing the Money Laundering Regulations 2003 and implementing 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
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Independent legal professional
An independent legal professional includes a solicitor working in a firm or as 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 where 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.
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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
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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
- publicly-funded work
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.
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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 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.
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 within the regulated sector in a category other than independent legal professional, this may affect your supervision under these regulations.
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1.5Other Law Society services
We provide a number of other services to assist you in meeting your AML/CTF obligations:
- a monthly e-newsletter, Gatekeeper, providing updates on legislation and case law, highlighting emerging warning signs and criminal methodologies and detailing training opportunities
- the Practice Advice Service, which can be contacted on 0870 606 2522 during office hours, which will help you to navigate the practice note and talk through general issues relating to compliance
- the AML directory listing solicitors willing to give other solicitors thirty minutes of free advice on legal issues relating to compliance
- training opportunities
All of the Law Society's AML/CTF services can be accessed from www.moneylaundering.lawsociety.org.uk
1.6Acknowledgements
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 |
| Mike Calvert | SRA |
| Geoffrey Prevett | formerly of Eversheds |
Others
| Richard Bark-Jones | Morecrofts |
| Chris McNeil | Freshfields Bruckhouse Derringer |
| 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 |