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Help! I'm a new MLRO: Tips on sources of funds

Last updated: 1 May 2018

This article was originally published in 2012.

Each firm will have its own distinct culture and way it does business. How a firm engages with its anti-money laundering obligations will be determined, in part, by its culture and the approach taken by its senior management and MLRO. Over time certain approaches to compliance and assumptions as to what is required will have become engrained across the organisation.

As a new MLRO, particularly if taking on the role in a new firm, it is important to understand your firm's compliance culture and the underlying assumptions held by the fee earners and partners.

Judging by the calls to our AML Helpline and comments at the MLRO networking groups, many MLROs still find the verification of source of funds a contentious area, with fee earners and partners often making a number of incorrect assumptions about their obligations.

So here are a few tips to help cut through the confusion:

1. The identity fixation

'If I have obtained a passport and two utility bills less than three months old I have done what the law requires' is a tenet of AML compliance quoted to the Law Society up and down the country. Quite aside from the fact that this is not what the law or the AML guidance actually say on identity, the real risk of money laundering really comes from the money involved in the retainer.

A passport or a utility bill may help you spot whether your client is engaging in identity fraud, which tends to increase the risk that they are also using the proceeds of crime. However valid identity documents do not mean that the person is not a money launderer. A quick review of the last few launderers in the news features in our bi-monthly AML Update will quickly dispel that myth.

2. But I couldn't possibly ask!

Some fee earners and partners still take the view that it would be dreadfully rude to ask the client about the source of funds.

Regulation 28(11)(b) of the Money Laundering Regulations 2017 requires you to ascertain the source of funds where necessary. In addition, if the client is a politically exposed person, Regulation 35(5) requires you to take adequate measures to establish the client's source of wealth and the source of funds involved in the transaction. It is almost always going to be necessary and appropriate for a solicitor to at least ask about the source of funds.

Most clients are quite used to being asked these sorts of questions now, particularly where the questions are asked politely and in the context of understanding the full transaction rather than in the format of an inquisition.

Source of funds questions may also assist you to provide better quality advice to the client, for example in terms of taxation considerations or protecting their interests where loans are provided.

3. How can I prove that the money is clean?

The law does not require you to prove that the money is clean. You have to be satisfied that it is consistent with the risk profile of the client and that where there are warning signs, they do not give rise to a suspicion of money laundering.

Therefore, if a person's wealth is clearly derived from legitimate means such as an inheritance, house sale or investment windfall and they are engaging in a transaction which is consistent with that wealth, you are not required to dig through their entire financial history to see if they ever committed an offence of any description.

Equally, if a client poses a high risk for money laundering and the source of funds information suggests that the risk may be crystallising; you cannot simply make a note to the effect that the funds are consistent with risk and continue. At that point you will need to seriously consider your reporting and ethical obligations.

Also be cautious about the clients' pat answers, particularly if they cannot be backed up by evidence.

  • Invoices for large payments simply entitled 'fees for services rendered' do not really shed much light on the actual source of funds.
  • The explanation that the client has a fair sum of cash to pay debts, fines or fees because they 'passed the hat around' with family, friends, work or a community group may be very legitimate. However if that explanation is provided by every client from the same family, organisation or community group, on a regular basis; it may warrant further consideration depending on the amount of cash and whether there are any other warning signs of money laundering.

4. If the money comes from a bank it's clean

There are tens of thousands of transactions through UK banks every hour of every day, processed at high speed. Financial institutions do not investigate every single transaction as to the source of those funds. If funds are provided from a bank account in the client's name, there is some comfort that the person has been identified by the bank and are less likely to be engaging in identity fraud. There is no comfort that the funds are clean, nor is this a defence to a money laundering charge.

As a new MLRO seeking to understand the compliance biases of your new firm, it may be useful to engage with partners and fee earners on this topic by raising a number of factual scenarios around source of funds and have them share what their approach would be and why. Use this as a starting point to open discussions about the risks each scenario poses, the practical consequences for the individual and the firm if those risk eventuate and what practical and proportionate steps they can take to mitigate the risks.

When you are trying to shift compliance attitudes, genuine involvement in creating a solution is more likely to be successful than simply telling people that they are wrong and must take a different approach.