This article was originally published in 2013.
Potential criminal sanctions for breaches of money laundering obligations tend to focus the mind of many money laundering reporting officers (MLROs) and be seen as a useful headline to keep the attention of partners and fee earners in training.
However, with relatively few solicitors being convicted of involvement in money laundering or failing to make a report, (out of around 180,000 solicitors on the roll) some may be forgiven for thinking: that will never happen to me.
As MLRO it is important to keep in mind, and draw to the attention of partners and fee earners that there are many other potential negative consequences for both the firm and also them individually if they do not take anti-money laundering (AML) compliance seriously.
Chapter 7 of the Solicitors' Code of Conduct requires firms to have in place systems to manage risk and to comply with legal obligations, while individuals employed with a legal firm are required to uphold the rule of law and act in a manner which maintains the trust the public places in the profession.
The Solicitors Regulation Authority (SRA) will take action against those who fail to comply with their AML obligations, including reference to the Solicitors Disciplinary Tribunal (SDT) where warranted.
The SDT take a firm line on non-compliance with AML obligations, and a review of decisions in recent years show that AML related breaches increase the likelihood of either being struck off, suspended, or restricted in the manner in which you are allowed to practise or be employed by a law firm.
It is also important to note that not only will action be taken against those who breach their AML obligations, but in some cases, those who should have been supervising their compliance.
There are a number of ways you can find yourself facing civil action for poor AML compliance. These include:
- If you did not undertake due diligence or did not look at the due diligence information you obtained, and if you had, you would have known your firm was being used as an instrument of fraud, then the victim of the fraud may sue you for negligence. A case example of this is Armstrong DLW GMBGH v Winnington Networks Ltd.
- If you formed a suspicion that you were dealing with the proceeds of crime and obtained consent to proceed with the transaction, the victim may still sue you for knowing receipt or knowing assistance, where you have acted in breach of trust. If the suspicious activity report you submitted has to be disclosed, it will provide evidence of your concerns about the funds or assets. Read more about these two actions in chapter 11 of the legal sector AML guidance.
- If you hand over privileged material to law enforcement agencies without client permission and where the crime/fraud exemption does not apply, the client may sue you for breach of contract or negligence. See our practice note on responding to a financial crime investigation for more details.
- If you are aware that you and a client need consent to proceed because of a suspicion of money laundering, and you seek consent for yourself, but do not discuss matters with the client or seek consent for them, they may sue you for negligence if they have subsequent difficulties with law enforcement agencies.
Other criminal offences
While this is looking again at potential criminal action, many solicitors think that once they have consent from the National Crime Agency (NCA), they have complete protection from criminal sanctions. This is not the case. Consent is only a defence to a charge of money laundering, it is not a defence to charges for any underlying criminal activity you may also be involved in. Read the NCA's FAQs on requesting consent and an article which considers this risk in the context of mortgage fraud.
Loss of revenue ... including fee earner's remuneration
If when acting for a client, there are warning signs of money laundering, and the fee earner fails to bring the matter to the MLRO's attention promptly, and subsequently it is realised that a report needs to be made and you cannot continue to act for the client, it may not always be appropriate for the firm to recover the fees for the work undertaken.
Further, if law enforcement agencies have taken steps to freeze your client's assets, then the 'choice' about recovery of fees may not be up to the firm.
Some firms are now taking the view that if fees are unrecoverable due to a failure to comply with AML obligations, those billable hours will not be recognised, which can have an effect on a fee earner's potential remuneration and promotions, a bottom line which may well provide a more tangible incentive for compliance.