Anti-money laundering

Anti-money laundering practice note – 15 December 2007

Chapter 1 – introduction

Contents

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 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.

Top of page

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.

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 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.

Top of page

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.

  • 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.

  • 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.

  • 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.

Top of page

1.4Legal framework

  • 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.

  • 1.4.2European 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.

  • Top of page

    1.4.3Proceeds 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 and prejudicing money laundering investigations

      Original Act and amended legislation.

    • 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.

      From 15 December 2007, the Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2007 amends 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.

  • Top of page

    1.4.4Terrorism Act 2000

  • Top of page

    1.4.5The Money Laundering Regulations 2007

    • Scope

      From 15 December 2007, the Money Laundering Regulations 2007 enter force, 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
      • 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.

      • 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
        • 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.

      • 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.

        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.

Top of page

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.lawsociety.org.uk/moneylaundering.

Top of page

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
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

Top of page

Anti-money laundering practice note – 15 December 2007