Money Laundering is a massive global issue. Recent estimates are that over $1trillion of illicit funds are laundered annually, with £90bn of that in the UK.
The problem is seemingly getting worse, and the professionals are coming under increased scrutiny to understand whether they are doing enough to prevent money laundering.
In October 2017, the government published its second National Risk Assessment into Money Laundering, and the legal profession has been identified as high risk for money laundering, although low risk for terrorist financing.
That is not to say that all solicitors are money laundering, but rather, where law enforcement see money laundering, there is a high risk that lawyers are involved. They single out lawyer’s involvement in “high end money laundering” which is defined as the laundering of large amounts of criminal funds (often the proceeds of serious fraud or overseas corruption) through the UK financial and professional services sectors.
The NRA identified three aspects of a lawyers practice which are high risk: Trust and Company Formation, Conveyancing and the use of the Client Account.
Of interest to accounts staff are the observations around the client account. The government has identified that criminals find the solicitor’s client account an attractive way of adding a layer of legitimacy to transactions. Once money has been paid out of the client account, a criminal can lie about its origins. Money which has been remitted to a client following the sale of a property, could be represented as damages from an injury claim.
To me, our accounts teams are a strong line of defence in the fight against money laundering. You see transactions sometimes in the abstract, without the distraction of the client’s various instructions colouring your view, and therefore do ask “why would they do that?”.
When I’m working with law firms I encourage them to deploy procedures involving the accounts process to prevent money laundering. After all, if the money doesn’t come into the firm the risk of laundering it is very greatly reduced. Here are my top 5 accounts procedures which can help prevent money laundering.
- CDD completed before any transactions take place
The Regulations require that Client Due Diligence is completed before the establishment of a business relationship unless it would interrupt the normal course of business and provided that it is carried out as soon as practicable. The SRA have just completed a piece of work where it examined how this works in practice. They found that 40% of firms had a complete ban on work prior to CDD being completed, whilst a further 36% had some other measures, such as not accepting funds, or only allowing administrative work like sending the client care letter before CDD was completed. They said they found these measures of stopping working on the file prior to CDD to be best practice.
In some firms this is controlled by the accounts team who provide a “break” in the process, for example, but not issuing a client number until the CDD is done. If your firm does allow work before CDD is completed, clearly there is a risk that funds could be received in breach of the regulations, and therefore having a process of accounts checking that it has been completed before either bank details are supplied, or when money is received is good practice.
- Cash Policy
Many firms have a low or no cash policy, and it is the accounts team who will monitor compliance with it. Small amounts of cash on its own is not suspicious, but firms should be mindful of a client who regularly pays in cash, particularly if there is an over-payment which may need to be refunded later.
- Risk Assessment of refund requests
The SRA says in their sector risk assessment “Firms should be aware of any attempt to pay funds into a client account without a genuine reason, or to get a refund of funds from a client account (particularly to a different account from which the original funds were paid).”
If accounts are asked to refund money, it is prudent to ask the lawyer to confirm whether they have considered the risk of money laundering before processing.
- Inactivity on files with funds on account
Some criminals will place funds with solicitors and then leave them inactive, so if this is picked up by the accounts team, inquiries should be made of the fee earner, and possibly to the MLRO.
- Requiring checks on third parties
It is not unusual for us to see payments into the firm from third parties, but this is a way that a criminal will seek to hide their identity in transactions but putting up a “client” to “front” the transaction with their money. Firms should think about adopting processes to identify third parties and the source of their funds, and accounts staff should be vigilant, that where a payment in is made from someone other than the client, that this is flagged, and risk assessed for suspicious circumstances.
Many people think that the secret to disrupting money laundering is in the client ID process, but that simply means that the person is who they say they are. It needs all members of the firm to be vigilant to money laundering, and I believe that as gatekeepers to the sought-after client account, our account team’s second pair of eyes on transactions are critical to our success in preventing money laundering.
Amy Bell is a Compliance Consultant with a passion for helping firms adapt to the changing legal landscape. She has 12 years’ experience in working with law firms, and this year launched Amy Bell Compliance Limited.
Through consultancy with partners and training, she provides support for everyone in the firm to understand compliance and how to apply risk management principles to improve client service and deliver efficiency.
She is the chair of the Law Society's Money Laundering Task Force, where she represents the Solicitors profession at Government and in Europe. She is also the author of the Law Society's Anti-Bribery Toolkit.