How can you handle red flags in real life?
Published March 15, 2023
AML Services Manager
It's easy to feel smug when reading about other solicitors getting fined for money laundering failings. But in fact, these cases offer a valuable opportunity for learning and growth.
It gives us all an opportunity to grow and learn from others. We have a moment to absorb and reflect on our policies, procedures and processes, ensuring we do our utmost to mitigate the risks and prevent fraud and money laundering. Consider this 2022 case where a solicitor allowed deposit monies to be transferred to a fraudster, resulting in a fine of £3,000 by the SRA.
Details of the case
The transaction was a commercial property sale for a purported client who provided bank details in the name of a third-party company. According to The SRA there was no evidence that the solicitor had enquired into the company. The deposit money was transferred (£67,857) to the purported seller, who turned out to be a fraudster impersonating the real owner and although the transaction did not ultimately go through, the deposit had already been sent. The damage had been done.
The SRA stated expressly that there was no evidence of any enquiries from the solicitor into the supposed seller or at least any record of it. From my experience of conducting audits and filing reviews on behalf of law firms, one common feedback point is the importance of ensuring we have a process to document and record the considerations we make at the time we made them, to ensure you always have the evidence to fall back on. It may be a pain at the time but, imagine you are giving yourself the best hand in a game of cards!
Here is some food for thought, broadly speaking, lawyers often go through a detailed and thorough thought process, trying to figure out who the client is and how they can help them. Not necessarily solely for an AML purpose, but also so that they can begin the work and think through the advice they will be giving the client in regard to a transaction.The problem with the ‘AML world’, however, is that this process is often not always captured. Fee earners retain it within, their minds. We all need to make a conscious effort to ensure our files are documented and show our consideration so that a bystander can look in and understand our logic, considerations and working out, essentially, how you became - and how you stayed - comfortable.
Now I did say broadly speaking. There are, unfortunately, instances where we miss red flags and the opportunity to stop fraudsters.
So how can we mitigate the risk attached to third-party payments and/or requests?
Ensure appropriate checks are made based on the unique client and transactions at hand. Before any money is moved or accepted, you must understand the rationale behind payments into and out of the firm’s client account. You should always be alerted to warning signs, such as the introduction of a third party, and you must ensure you understand the rationale.
How to approach a red flag?
One method commonly used is the five W and H, six little questions. These are the first building blocks. These six questions lay the foundation, supporting us with information gathering and putting us in a position to decide our next steps (if any):
Who are they?
What do we know about the third party?
Where are they located?
When did they incorporate or When did they make the request?
Why does the client want the transaction structured this way?
How is the third party linked to the client?
If needed, we can build on our foundations; for example, do we hold any identification & verification for the third party? Do we have an understanding of the purpose and nature of the entity? Do we understand the ownership and control of this entity?
You must remain alert to red flags and warning signs of a crime potentially taking place. While you do not have to be a police officer, you must make the sort of enquiries that a reasonable person (with the same qualifications, knowledge and experience as you) would make.
The Legal Sector Infinity Group guidance document - section 18.2, provides a detailed list of examples of red flags to watch out for, and we should ensure that our teams are aware and empowered with the knowledge of specific red flags that are relevant to our departments.
By being proactive and vigilant, you can mitigate the risks of fraud and money laundering and provide the best possible service to your clients.
Solicitor fined for allowing £68,000 deposit payment to fraudster - The Law Gazette
Anti-money laundering guidance for the legal sector - Legal Sector Affinity Group
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