Whether you work for a big firm or a small one, you’ve probably noticed a renewal of interest in money laundering issues on the part of your principals in recent months. The Solicitors’ Regulation Authority (SRA) has made money laundering one of its key priorities this year, and has already carried out a number of inspections of money laundering procedures in bigger firms, not always it appears with results considered satisfactory. The SRA’s initiative will be followed later this year by new money laundering regulations in the UK, which will create additional responsibilities on solicitors to find out who is in control of suspect companies or trusts, and to prevent lawyers (among others) being used to facilitate terrorist financing. All in all, this is a good time to refresh your memory on the basic principles of the money laundering rules, and where necessary to ask for further training and guidance.
The Money Laundering Regulations 2007 comprise a system that minimises the risk of criminals or terrorists using transactions which seem, on the surface, to be perfectly legitimate – such as buying property, for example, acquiring or setting up a limited company, creating a trust or even settling litigation – to funnel and clean “dirty money”. This is an obvious risk for large law firms, but the SRA has recently made the point that small firms can also be an attractive target, because their money laundering procedures may not be as complete or as strict. Unfortunately, everyone has to be on their guard, regardless of the size of their business.
Money laundering has always been a concern for solicitors’ firms, but the current and more systematic rules were created in 2003, via the first Money Laundering Regulations. The stand-out provision of these initial measures was that solicitors (and their support staff) could now be guilty of committing a criminal offence if (in summary) they assisted in a transaction which they knew, suspected or had reasonable grounds to suspect involved the proceeds of a crime. They could also be guilty of an offence if they told the client that they had made a disclosure to the authorities about a transaction – the so-called “tipping off” offence. The current 2007 Regulations and the Law Society Practice Note of October 2013 contain a code by which lawyers can demonstrate that they have taken reasonable measures to ensure that they have not committed these offences. If a firm follows the 2007 Regulations and the Practice Note, its employees should not, in theory, be guilty of any criminal offence.
The Law Society requires all firms to have a nominated officer or money laundering reporting officer (MLRO) to take charge of money laundering matters; this will usually be the Compliance Officer for Finance and Administration (COFA), but not always. If you do not know who the MLRO is in your firm, find out. The MLRO is responsible for reporting any suspicious transactions to the appropriate authorities, and in most firms will take charge of the systems that pick up questionable transactions, including customer due diligence, record keeping, and the training of support staff; in bigger firms, however, the MLRO may delegate management of some of these responsibilities to more junior employees.
Money laundering policy differs from firm to firm on what is called a risk-based assessment; the extent of the risk depends on the size of the firm and the complexity of the work it undertakes, and the MLRO adjusts the firm’s policies accordingly. That means that there are no hard and fast rules, but there are some basic elements which apply to all firms. Again, it’s imperative that you know about the systems that apply in your own firm, and it is the responsibility of the MLRO to ensure that you do.
Every firm must have a system of customer due diligence which is applied to every client, but which depends on the type of client, the business relationship, and the transaction in which the solicitor is acting. At its most basic level, this will involve verifying that the client is who s/he says she is by means of ID evidence. There are further complex rules for verifying the identities of companies, trusts, foundations and clients who cannot produce standard ID documentation, and it is the MLRO’s responsibility to ensure that everyone who needs to know about these rules is aware of them.
Every firm (other than sole practitioners) must have a system setting out the circumstances in which it has to make a suspicious activity report (SAR) to the National Crime Agency. There is a list of “red flags” which will automatically classify a client or transaction as suspicious. You need to know what your firm’s policy is in this area, particularly if management considers that support staff have a responsibility to report suspicious activity to the MLRO.
Furthermore, every firm has to have a record keeping system that will prove, when and if it is necessary, that the firm has complied with the money laundering regulations. This includes keeping copies of any documents disclosed by the client during customer due diligence, of any risk assessments made by the MLRO, and records of any suspicions, whether or not they lead to an SAR. To avoid the risk of “tipping off”, the Law Society recommends that these details should be kept on a separate file and off the main client file, although there are firms where this may not always be possible.
The Law Society Practice Note on Money Laundering reminds legal firm managers that “your staff members are the most effective defence against launderers and terrorist financers who would seek to abuse the services provided by your firm”. As a result, there is a specific responsibility on firms to ensure that all staff, including reception, administration and finance staff, are given adequate, regular and appropriate money laundering training: as far as regularity is concerned, the Law Society recommends that staff should receive training every two years.
So, if you haven’t had an update on money laundering for a while and nothing seems to be on the horizon, it is worth reminding the MLRO in your firm that you will almost certainly need some further training before the new regulations come into force. These are very important provisions and skimping or ignoring them could render your boss, and even you yourself, criminally liable. Make sure you have all the training you need.
© Jocelyn Anderson 2015