Legal Services - Money Laundering Legislation (2) Flashcards
What is money laundering legislation?
Money Laundering: Legal practitioners are at specific risk of criminal exploitation, so are subject to strict legislation.
(1) Stages of Money Laundering: There are three stages of money laundering.
Placement: Criminal proceeds are introduced into the financial system.
Layering: Criminal proceeds are distanced from criminal activity through legitimate activities.
Integration: Criminal proceeds are integrated, and the criminal reclaims legitimate money.
(2) Risks of Money Laundering: Solicitors are at ‘key risk’ of money launders (SRA Risk Outlook).
Companies/Trusts: Companies and trusts may be set up to launder money.
Client Accounts: Client accounts may be used to swap illicit money for clean money.
Real Estate: Properties may be bought in replacement of proceeds.
Sham Litigation: Litigation may be a ‘sham’, where default judgments are used to transfer funds.
Money Laundering Legislation
Money Laundering Legislation: Money laundering (and terrorist financing - use of funds for illicit political purposes) is regulated by the ‘Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017.
(1) Scope: Applies to all persons and groups acting in the course of business in the United Kingdom, including independent legal professionals (Regulation 8; 12). Breach of legislation is a criminal offence.
(2) Legal Authorisation: Legal practitioners and firms must apply for SRA approval in respect of certain activities stipulated in the legislation, which is generally granted unless there is a relevant offence.
Relevant Offence: A breach of laundering or financing legislations, or evidence of deception or dishonesty (Sch 3).
Acting without Authority: Acting without authority is punishable by imprisonment and fine (Reg 26).
(3) Duties: Both the SRA Conduct Rules and legislation imposes specific responsibilities on firms and solicitors, such as: a) risk assessments; b) controls and procedures; c) training; d) record keeping; and e) due diligence.
How do firms identify risks of money laundering?
Risk Assessment: Firms must conduct risk assessments to identify risks of money laundering (Reg 18).
(1) Industry Assessment: The SRA produces an industry-wide assessment, and the Government produces a ‘National Risk Assessment’. Both must be reflected in the firm-specific assessment.
(2) Enforcement: The SRA may request inspection of assessment, and take action where inadequate.
(3) Record Keeping: Firms must maintain up-to-date written records of each step in the assessment process.
What controls and procedures must be maintained to prevent money laundering?
Controls and Procedures: Firms must conduct and maintain anti-laundering controls and procedures (Reg 19).
(1) Reasonable Requirement: Measures must be reasonable with respect to size and nature of the firm and must reflect risks identified by the firm assessment.
(2) Approval: Measures must be approved by senior management.
Statutory Measures
Statutory Measures: Firms must impose a number of statutory measures.
(1) Employee Screen: ‘Relevant’ employees must be screened prior to and during employment with respect to skills, knowledge, conduct and integrity (Reg 21). These are employees whose work is at risk of laundering.
(2) Independent Audit: Firms’ controls and procedures must be independently audited (Reg 21).
(3) Enforcement Response: Firms must be able to fully and effectively respond to law enforcement regarding whether it does or has in the past 5 years maintained a business relation with any person, and how (Reg 21).
(4) Money Laundering Reporting Officer: All firms must appoint a ‘MLRO’, or ‘nominated officer’, to receive internal laundering suspicion reports, and liaise with the NCA if necessary (Reg 21).
Requirement: Individual may be NQ, provided they have necessary understanding and experience of financial crime.
(5) Money Laundering Compliance Officer: Firms of appropriate size and nature should appoint a ‘MLCO’ or ‘compliance officer’ to act as point of contact between the firm and SRA on laundering issues (Reg 21).
Requirement: Individual must be a senior member of the firm, equivalent to a director. They may be both MLRO and MCLO.
What training and record keeping must be provided?
Training
Training: Firms must provide and keep record of training to employees (Reg 24).
(1) Requirement: Employees must be trained on legislation relevant to their role on a regular basis, either face-to-face or virtually, alongside a staff manual.
(2) Breach: Failure to provide suitable training provides employees with defence to certain PoCA 2022 offences.
Record Keeping
Record Keeping: Firms must produce and maintain records and documents relating to due diligence, transactions and subject to due diligence, and ongoing monitoring, and retain them for at least 5 years after relationship ends (Reg 40).
What due diligence must be performed?
Due Diligence: Firms must conduct client due diligence, meaning ‘identity verification’, in every relation and transaction (Reg 27).
(1) Business Relations: Identity must be verified prior to any ongoing business relationship.
Ongoing Monitoring: Solicitors must also conduct ‘ongoing monitoring’ of business relationships to ensure they remain consistent with their knowledge of the client (Reg 28).
(2) Occasional Transactions: Identity must be verified prior to an ‘occasional’ one-off transaction, provided:
Funds Transfer: At least €1,000 are being electronically transferred.
High Value: The transaction or linked transactions amount to at least €15,000.
(3) Other Suspicions: Identity must be verified in any other circumstance in which suspicions are raised, including where the identity documents themselves are doubted.
(4) Time of Identification: Identity must be verified as ‘soon as possible after first contact’ and before any work is conducted (Reg 28; 30).
Business Relation: Business relation identification may be delayed if there is low risk, but must be completed before conduct of business and as soon as practicable (Reg 31).
Simplified Due Diligence
Simplified Due Diligence: Simplified due diligence is permitted in respect of ‘low risk’ clients. Solicitor merely requires evidence of eligibility for simplified due diligence, i.e. LSE listing.
Low Risk: Clients on the regulated market, and clients within low-risk markets (Reg 37).
Standard Due Diligence
Standard Due Diligence: Standard due diligence requires verification through independent reliable documents (Reg 28).
(1) Natural Persons: Natural persons should be identified by one of the two following methods:
Single Gov ID: A single government issued ID verifying full name, and address or DoB.
Supported Gov ID: A single government issued ID verifying full name, supported by a document verifying full name and address or DoB.
(2) General Partnership: Constituent individuals of partnership must be identified.
Reputability: Reputable partnerships may be verified using public information - name, address and nature of business.
(3) Body Corporates: Body corporates (incl companies) require proof of registration and proof of client authority to act on behalf of the corporation (Reg 43).
Companies: Name, reg number, office and place of business must be identified.
Unlisted: Unlisted companies require identification of jurisdiction, constitution, governing documents, names of directors and senior individuals.
(4) Beneficial Owners: The beneficial owners of non-natural clients should be identified, unless the client is listed on a regulated market or simplified due diligence applies.
Company: Ultimate Controllers, Persons of Significant Control, as well as holding companies (Reg 5).
Partnership: Those who control more than 25% of capital, profit or voting rights, or otherwise control management (Reg 5).
Trusts: Settlors, trustees, beneficiaries, and other controllers (Reg 6), incl. beneficial owners of those parties.
Others: Beneficial owners of other bodies are those who hold similar positions to those under trust.
Enhanced Due Diligence
Enhanced Due Diligence: Enhanced due diligence applies to high risk clients, and requires enhanced monitoring and as many measures as reasonably possible to monitor transactions (Reg 33).
(1) General Risks: General high risks include:
Risk Assessment: Clients identified as high risk in firm or industry assessment.
High Risk Country: Clients in ‘high risk’ countries per the legislation.
False Documents: Clients who provide false or stolen ID documents.
Illogical Transactions: Transactions which serve no apparent economic or legal purpose.
Complex/Unusual Transactions: Transactions which are unusually complex or large, or suspicious, such as clients who refuse to meet in person.
(2) Politically Exposed Persons: Clients, or close family members or business associates, who hold high-ranking prominent public function positions will also indicate a high risk.
Scope: This includes spouses, children, step-children and parents, and covers:
Government: Heads of State and Government, Ministers and Deputy Ministers.
Parliament: Members of Parliament.
Judiciary: Members of the Supreme Court or equivalent, or the Court of Auditors.
Central Banks: Board Members of Central Banks.
Diplomats and Military: Ambassadors, Charges D’Affaires, High-Ranking Military Officers.
State Enterprises: Board Members of State-Owned Enterprises.
Senior Approval: Solicitors require approval by senior management to act for PEPs, and must establish the funds of any sources and enhance monitoring therein.
