Money laundering warning signs
Whether you’re a fee earner or a money laundering reporting officer (MLRO), recognising warning signs of money laundering is a continual challenge.
This guide looks at some common money laundering warning signs and how to respond to them.
Despite criminals continually adapting to changing markets and opportunities, there are signs to look for which can alert you to possible money laundering.
Unusual and secretive clients
It’s important that you make fully informed and risk-based decisions on new clients and new types of business from both new and existing clients.
To help assess the risk posed by new clients, you should try to understand why they chose your firm. For example:
- why is a client who lives far from your firm contacting you in relation to a retainer which has no geographic connection to your firm?
- why is a client instructing you in a field or type of work you have not practised in before?
- why are foreign nationals, who are overseas residents, instructing your firm when you have no connection or profile within that country?
Your practice should have customer due diligence (CDD) procedures in place to identify clients.
If a client refuses to answer questions or give you information about themselves, you should consider whether this is suspicious.
Clients trying to launder funds will often try to carry out unusual transactions. The transaction may be unusual for:
- your firm
- your understanding of a client in their position
- the type of retainer they’re undertaking
This may not be enough to give rise to a suspicion of money laundering, but it’s a warning sign that needs to be followed up.
Unusual source of funds
Regulation 28 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) requires you to scrutinise transactions to make sure that they’re consistent with your knowledge of the client.
Large amounts of cash or private funding, even if held in a bank account, may be a warning sign of money laundering.
You should consider how the client is able to have this amount of private funding and whether it’s consistent with what you know about them. You may even ask for documentary evidence to support their account, for example:
- bank statements
- recently filed business accounts
- documents confirming the source, such as a sale of a house or shares
Where cash is involved, identifying the source of funds becomes more challenging. For example, a bank statement showing a large withdrawal might not refer to the cash you’re trying to identify.
Equally, a bank statement showing a large cash deposit does not provide you with information about its origin.
In these situations, you should ask yourself:
- is this consistent with what I know about the client?
- does the information make me suspect there is criminal property involved?
Third-party funding is a normal feature of many conveyancing transactions and other retainers. However, it can also be a way to layer criminal property.
You should consider why the funds are coming from the third party.
- Is it a gift or a loan, and if so, what practical or legal consequences are there?
- How can the third party afford to provide this money?
- Have the funds come from someone else because your client is on the sanctions list and cannot access a bank account of their own?
If you have a third-party funder, you should consider the risk of money laundering and whether you should conduct any checks on them and the source of funds.
Sudden changes in instructions
In challenging economic times and a fast-paced global economy, transactions can fall through and your client's instructions may change without warning.
Ask yourself whether there's a reasonable explanation for any changes to the retainer, for example the company goes bankrupt or a couple buying a home decide to divorce.
Where there is no clear explanation, particularly if there are other warning signs, you should ask questions such as:
- is this sudden urgency a ploy to ensure that you do not ask too many questions or to encourage you to pay out funds before you realise that the cheque they gave you was fraudulent?
- does the sudden settlement of litigation or falling through of a property or company deal mean that the initial instructions were just a ploy to get money into your client account?
Sham litigation is just one of the methods in which sudden changes of instructions feature.
In October 2017, HM Treasury published the second National Risk Assessment (NRA) of money laundering and terrorist financing as significant threats to the UK’s economic security.
The NRA specifies the following services as most likely to be abused by money launderers:
- trust and company formation
- the operation of a client account
To reduce risks when operating in these areas, you must make sure you comply with the latest anti-money laundering guidance and pay attention to warning signs that could signal the presence of money laundering.
You should also apply appropriate levels of CDD and enhanced due diligence before providing these services.
Trust and company formation
According to the NRA, money laundering investigations often see the use of trusts and companies as vehicles to hide beneficial ownership. It says those service providers who offer, for example, the replacement of nominee directors or registered offices, are most at risk.
If a client engages you to create and/or manage an entity without seeking legal advice beyond the routine aspects of formation, you should consider whether they’re attempting to add a layer of legitimacy to their activities through your involvement.
Warning signs include:
- secretive or suspicious behaviour by the client
- formation of a shell company in an offshore jurisdiction without a legitimate commercial purpose
- interposition of an entity in a transaction without any clear need
- unnecessarily complex corporate structures
You should pay special attention where trust and company services:
- are provided in conjunction with the other services identified as high risk
- involve high-risk jurisdictions
Firms that facilitate property transactions should ensure the higher money laundering risks in conveyancing are:
- reflected explicitly in their internal risk assessment
- mitigated through comprehensive and effective CDD
Warning signs include:
- rapid succession of transactions relating to the same property
- use of cash or third-party intermediaries without adequate commercial explanation
- use of overseas trusts or companies to conceal property ownership
- unexpected early repayments, for example of a mortgage
The NRA says that special attention should be paid to transactions involving ‘super-prime’ residential property in London and Edinburgh.
Commercial property takes longer to move and is therefore subject to a lower risk rating. However, it can be purchased to set up a network of opaque company structures or to create cash-intensive businesses involving money laundering or predicate offences.
The NRA views the rapid and often large-scale movement of funds through client accounts as a money laundering risk.
You must comply with the SRA’s Solicitors Accounts Rules, which:
- prohibit the use of the client account as a banking facility
- require all monies in the account to be linked to an underlying transaction or retainer
Warning signs include:
- instructions to act as a bank or escrow agent, or pay bills unrelated to the matter
- instructions to return overpayments to a client or a third party
- instructions to pay out funds at intervals
- transactions aborted for no clear reasons
The presence of cash in a transaction can act as a warning sign. The NRA says that the use of cash has declined, but it remains a popular means of payment. Firms should adopt a cash policy in response to the risks posed by cash.
You should pay special attention to cash transactions. You should not accept cash payments above the limit specified in your company’s cash policy.
Responding to warning signs
Asking the client for information is the first step in responding to a warning sign.
It’s the answers your client gives, and more importantly the way they give them, which will help you to assess whether your warning sign gives rise to a suspicion of money laundering or not.
Make sure you record the questions you ask, the answers given, and any support material you receive. This will be useful if the retainer is later queried by the SRA or law enforcement.
You can reduce the chance of money laundering occurring and protect yourself from regulatory or law enforcement action with a few key steps:
- stay alert to warning signs
- ask questions
- document the answers you’re given
- follow your firm's internal reporting procedures and consider whether you need to make a suspicious activity report
It’s also good practice to have a cash acceptance policy to:
- mitigate insurance risks
- reduce risk to your staff when they carry large amounts of cash to the bank
- provide a clear signal to clients that you will not accept being used for money laundering
You should also:
- be careful who you give your account details to
- request that all funds are transferred electronically to help provide an audit trail
- ask your accounts staff to monitor your bank statements for any cash payments into your client account
- match cash payments to retainers and review the retainer in light of the risks posed by the cash payment
- encourage your fee earners to ask questions about the client and the purpose and nature of the retainer, including the source of funds
- consider whether the explanations for the existence of large amounts of cash or private funding are credible and, if not, consider your obligations under the Proceeds of Crime Act 2002
Where there are several warning signs you should make suitable enquiries to satisfy yourself that you do not have a suspicion of money laundering and so do not have to make a report to your firm’s MLRO or the National Crime Agency (NCA).
After you've received explanations and supporting documents, if you’re still concerned that money laundering is taking place, you’ll need to look at whether there is criminal property involved.
You cannot have money laundering if there is no existing criminal property.
You may suspect that criminal property is involved because:
- you have information about a specific offence – such as tax avoidance, fraudulent benefit claims, or press articles which show a client has been charged with drug offences
- this is the conclusion to be drawn due to the handling of the funds in the transaction
In these cases, large amounts of private funding which do not fit the client profile, and for which there is no legitimate explanation, may warrant a suspicion of money laundering.
The Legal Sector Affinity Group’s Anti-money laundering guidance for the legal sector
Politically exposed persons – our guidance on dealing with politically exposed persons