Don’t let outdated understanding of AML risks leave your firm vulnerable
Published November 17, 2022
AML Services Manager
If you don’t apply AML checks across the board and still follow an unregulated or regulated approach to compliance, ensure you are fully informed of the risks before you continue. The SRA will expect to see what controls you have in place to protect your firm. Be sure to document your considerations, controls and steps taken within your practice wide risk assessment.
The first step is to understand your vulnerabilities; question and consider how your products and services could be abused by criminals. Secondly, consider how they can be abused in disguising the ownership or control of criminal property.
Some of the key considerations when choosing which approach is right for your firm, and the risks attached, are as follows:
Look out for sham litigations
The National Risk Assessment highlights the risk of litigation. Whilst litigation falls traditionally outside the scope of the Money Laundering Regulations (MLR), always be mindful of offences under the Proceeds of Crime Act. The exceptions granted within case law only apply to genuine litigation. There is still a risk of committing a money laundering offence if the litigation is not genuine and is a set up. This situation is known as sham litigation.
There are numerous variations on the concept of sham litigation, but the below are among some of the most common methods used by criminals;
Criminals agree to sue each other with the payment of damages being used to launder their funds.
Criminals arrange to bring cases against themselves using sham companies.
Criminals approach a law firm and ask for them to act in a dispute. The criminal sends over funds as an upfront payment on account and subsequently requests them back, minus a small fee for initial advice. The law firm then returns the now laundered money (this example is not limited to litigation services).
Criminals instruct a law firm on a debt recovery matter before any work has been completed. The debtor approaches the law firm confirming they are aware they have been instructed and they wish to settle. The money is sent to the law firm by the debtor and subsequently sent on to the criminal minus a fee for the law firm's services.
Be wary of client passporting
Passporting is where a client starts their relationship with a law firm in a lower risk, usually unregulated area of the business, where due diligence is not completed or is completed to a lower standard. They then transition through departments within the firm to a regulated department. The firm then proceeds without the required due diligence.
This can lead to a breach of the Money Laundering Regulations in some instances. Situations like these can also lead to awkward conversations if you have to ask a client to retrospectively complete CDD checks.
Reassess long-standing clients’ CDD
Never lose sight of underlying rules that apply to all solicitors. These include rule 8.1 of the SRA code of conduct - You identify who you are acting for in relation to any matter. All departments and regulated individuals regardless of the work being undertaken, need to have a clear understanding of who our clients are regardless.
As with many business models, one of the key objectives for firms is to keep a client for life. In other words, to provide any service that they need within the firm's expertise once they are on boarded as a client of a firm.
Don't fall into the trap of assuming that your long-standing clients must have been through sufficient CDD. If a client was initially onboarded without MLR compliant CDD, and then subsequently represented in a regulated matter, an offence would be committed.
Other routes that could subject your firm to MLR
Even if your firm does not fall in scope via the ‘traditionally’ assumed areas of practice it may be that you need to consider other ways your firm may fall in scope of the money laundering regulations, such as Definition of a Tax Adviser. This affects a wide range of service areas: employment, litigation, estate planning, wealth management, corporate and family.
Also be mindful of internal perception. Ensure that your people understand the importance of identifying red flags, as well as escalating and documenting any suspicions. Particularly for mixed practices where the services on offer are split between regulated and unregulated areas of work. There’s always a risk that there could be criminal property identified within an unregulated matter which could impact your firm in the future. Ensure that your procedures protect the firm as much as possible.
Here’s an example of what a case like this could look like in practice:
Your firm is instructed on an unregulated family matter, a divorce.
Due to the enquiries made during the course of your matter you are aware of the presence of dirty money; a property was transferred to your client as part of the divorce proceedings.
This was not reported at the time to the NCA due to the protection offered.
The client comes back to your firm and decides they want to sell the property and wishes to open a conveyancing matter.
In a case like this, you would want to make sure that your firm is protected. This matter would fall within the scope of S.328 of POCA and you would have a duty to report this to the NCA.
The regulator will look to see what controls you have in place to mitigate the above scenario occurring, so ensure you have thought about this.
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