Source of funds checks

Your source of funds obligations

The Money Laundering Regulations 2017 only mention the source of funds in two places:

• regulation 28, for ongoing monitoring
• regulation 35, with respect to politically exposed persons (PEPs)

In regulation 28, the obligation is to:

“scrutinise transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile”

Regulation 33 provides that you carry out enhanced due diligence and enhanced ongoing monitoring (in addition to client due diligence under regulation 28) where:

• a high risk of money laundering has been identified under your risk assessment or from information provided by your supervisor
• either party is established in a high-risk third country
• the client is a PEP
• the client is established in a high-risk third country
• the client has provided false or stolen identification documentation or information on establishing the relationship and you have decided to continue dealing with them
• any other situation which you have assessed as presenting a higher risk of money laundering
• the transaction:
  • is complex
  • unusually large
  • forms an unusual pattern of transactions, or
  • has no apparent economic or legal purpose

In regulation 35, the obligation with respect to a PEP is to:

“take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship or transactions with that person”

As part of the enhanced due diligence process, you should verify the source of wealth with evidence obtained from the client and/or independent source until you are comfortable that:

• you understand where the client’s overall wealth has been derived from, and
• (to the best of your knowledge) it is legitimate

Under POCA, you must make a report if you suspect that someone is engaging in money laundering.

This requires that you suspect that someone has criminal property: there can be no money laundering without criminal property.

Are the funds clean or consistent with risk?

If you are concerned about a transaction, first consider whether you are concerned:

• that the person is not who they say they are, or
• about the source of funds

If you are concerned the person is not who they say they are, further identity information will not help to mitigate the risk.

For each retainer, it is important to understand where the funds to finance the transaction are coming from.

This information will help you to decide the level of scrutiny (if any) required of that source.

You are not required to question a wealthy private client about their entire financial history just because they may at some point have avoided paying tax.

Nor are you required to undertake detailed due diligence of a business to see if some point they failed to pay for a required regulatory licence.

You are required to consider whether the source of funds is consistent with:

• the risk profile of the client
• the retainer
• their business

When dealing with a PEP, you also need to consider if there is any information about corruption or evidence that government funds are being used inappropriately.

Supporting documents and proof

You may want to ask for supporting evidence to confirm the information provided.

Where supporting evidence is provided, look at that evidence dependent on the level of risk to see if it’s actually consistent with the client’s explanation or whether it brings up more questions.

If an explanation is consistent with the client’s risk profile and the type of retainer, and you do not have other AML concerns about the transaction, you may note the explanation on the file and have accounts staff check the funds are coming from the bank accounts the client said they would come from.

The type of documentation acceptable to verifying source of funds depends on the level of risk.

If the transaction is higher risk, you may ask for supporting evidence, possibly in the form of:

• bank statements
• recently filed business accounts, or
• documents confirming the source, such as:
  • sale of a house
  • sale of shares
  • receipt of a personal injuries award
  • a bequest under an estate
  • a win from gambling activities

Where cash is involved, it becomes more challenging.

A bank statement showing a large withdrawal does not mean that the cash the client is now in possession of was actually the money withdrawn.

Equally, a bank statement showing a large cash deposit does not provide you with information about where the cash came from in the first place.

There can also be situations where a client cannot or will not produce any paperwork to back up the story of where the funds have come from.

Does this mean that you automatically suspect money laundering?

Not everyone is efficient at keeping paperwork and the funds may have arisen some time ago.

Keep asking yourself the following questions:

• is this consistent with what I know about the client?
• do I have information which makes me suspicious that there is criminal property involved?

If the retainer is consistent and you do not suspect that existing criminal property is involved, you do not have to go further to prove that the funds are clean.

Make sure you document the questions asked, the answers given and any supporting material received, should the retainer later be queried by the Solicitors Regulation Authority or law enforcement.

What if I am still concerned?

If you’re still concerned about the source of funds, you need to look at whether criminal property is involved.

You may suspect that criminal property is involved because you have information about a specific offence, such as:

• tax being avoided
• benefits being received that should not have been
• press articles that show a client has been charged with drug offences

Alternatively, you may suspect that criminal property is involved because this is the irresistible conclusion to be drawn due to the handling of the funds in the transaction.

Large amounts of private funding that do not fit the client profile, and for which there is no legitimate explanation, may warrant a suspicion of money laundering.

If you have a suspicion of criminal property, consider whether you need to make a suspicious activity report to the National Crime Agency and whether you will need consent to proceed.

Flowchart A in annex I of the anti-money laundering guidance for the legal sector will help you with this process.

Protecting your firm from money laundering

Just because money comes from a client’s bank account does not mean it’s clean.

The bank may have made a suspicious activity report and received consent to send it to you, while law enforcement gathers evidence on how the funds are being used.

You need to make your own decision about the consistency of the funds with the client and whether there is information on which you can form a suspicion of money laundering.

Remember that you are not a police officer investigating potential crime; you’re simply taking steps to protect your firm from being used to launder funds.

It is your client account and you can ask questions about what money is being deposited into it.

Not forgetting about the importance of adopting a risk-based approach, you’re entitled to take a pragmatic approach and use your knowledge about how retainers proceed and are generally funded when weighing up the answers provided.

Without existing criminal property, you do not have money laundering.