Warning signs of money laundering

Unusual and secretive clients

It’s important 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 practice. For example:

• why is a client who lives far from your practice contacting you in relation to a retainer which has no geographic connection to your practice?
• 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 practice 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.

Find out more about customer due diligence.

Unusual transactions

Clients trying to launder funds will often try to carry out unusual transactions. The transaction may be unusual for:

• your practice
• 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 Regulations 2017 (MLR 2017) requires you to scrutinise transactions to make sure they are 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, such as:

• 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

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, 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.

Trust and company formation

According to the national risk assessment, money laundering investigations often see the use of trusts and companies as vehicles to hide beneficial ownership.

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

Conveyancing

Practices 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 national risk assessment says 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.

Client accounts

The national risk assessment views the rapid and often large-scale movement of funds through client accounts as a money laundering risk.

You must comply with the SRA 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 national risk assessment says that the use of cash has declined, but it remains a popular means of payment.

Practices 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.