A client’s exchanged contracts with a cash buyer who refuses to share the source of funds. What should I do?
An existing client has asked us to act in the sale of a commercial property sold at auction. We were not involved before the auction. Contracts have been exchanged with an unrepresented cash buyer who is refusing to share information regarding their identity or source of funds. I’m the money laundering reporting officer (MLRO) – what should we do?
You need to mitigate the risk of your client and your firm being used for money laundering, which can happen regardless of whether you’re dealing with your client’s funds or those of another party.
The client may not understand the risks of being involved in money laundering and, given your duties to act in their best interests, they should receive legal advice on all aspects of the situation, including the contractual implications.
You should discuss with the client what they know about the buyer and explain why you need the information about identity and source of funds.
Although the buyer is not your client, it's prudent to carry out customer due diligence on them and make enquiries about the source of funds. This will help you to assess whether there may be criminal property so that you can take steps to protect your client as well as your firm.
You should also recommend that the buyer takes independent legal advice; you cannot act for the buyer as there would be a conflict of interest.
If the buyer refuses to cooperate with you or your client, you may be able to obtain some information from the auctioneers (who will be holding the deposit).
If the auctioneers are subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, they should have obtained information about the buyer and may be able to provide you with copies.
You may also consider e-verification in relation to the identity of the buyer and/or doing your own internet search. It’s important to document whatever steps you take.
You should consider the overall risk profile of the transaction, bearing in mind all the circumstances.
If, despite your efforts and those of the client, you cannot satisfy yourselves as to the buyer’s identity and/or source of funds, you may need to consider as a firm whether you can continue to act.
As you have highlighted, your client is in a difficult position in that they are contractually committed and you would need to consider the client’s instructions (and how they are responding to the issues raised).
You may decide to continue to act but to make a report to the National Crime Agency (NCA) because, having considered the offences, you’re suspicious that there is money laundering.
You need to consider:
- why you are concerned
- the grounds for suspecting that there is criminal property
As you’re continuing to act, you’re at risk of ‘entering into an arrangement’. A defence to this is to seek consent from the NCA. You'll need to consider your client’s position as they are also at risk of committing an offence. Ideally, you would report on your behalf and that of your client.
You may decide that you have to stop acting, but you'll need to consider carefully how you terminate the retainer – given the client’s contractual obligations. You should make that decision with the compliance officer for legal practice (COLP) to make sure that all the conduct issues are addressed.
The question of whether you report under the ‘failure to report’ offence then arises. You can find further guidance on this point in our Anti-Money Laundering Toolkit (3rd edition).
The guidance in the toolkit will help you to consider all the elements, including:
- whether the information came to you in privileged circumstances
- what grounds are for reasonable suspicion
If, for example, you took the view that the information had come to you in privileged circumstances, you would terminate the retainer but not make a report to the NCA.
You'll also need to consider the terms of the auction contract carefully and, in future matters, you may wish to consider including provisions in the auction contract which assist with this point where you're involved at the pre-contract stage.
While every effort has been made to ensure the accuracy of the information in this article, it does not constitute legal advice and cannot be relied upon as such. The Law Society does not accept any responsibility for liabilities arising as a result of reliance upon the information given.
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