Legal Services - Unit 3

Question 1

What is money laundering?

Answer 1

The process by which criminals seek to alter/launder their proceeds of crime so that it seems these funds come from a legitimate source.

E.g. investing stolen money.

Question 2

Why are solicitors specifically targeted for money laundering?

Answer 2

As they deal with large sums of money for clients and that money may be held in other jurisdictions.

Question 3

What are the 3 stages of money laundering?

Answer 3

Placement - Money from criminal activity is introduced into the financial system

Layering - The money is distanced from the criminal activity by passing it through a number of parties and transactions.

Integration - The money is integrated back into the financial system and the criminal is now in possession of ‘laundered’ money.

Question 4

What parts of a solicitor’s work are thought to be particularly high risk for money laundering?

Answer 4

1) Company and trust work - Due to their complex structures and ongoing natures - Both companies and trusts can be complex legal entities. So, when setting them up, money can be hidden behind complicated structures and layers of ownership. Solicitors can also sometimes be involved in the ongoing management of companies and trusts and can be used to create the appearance of respectability.

2) Use of a client account - Passing money through a firm’s client account is an obvious way of swapping illicit money for clean money.

3) Real estate - Money has to pass through the firm’s client account to enable the transaction to proceed. At the end of the transaction, the criminal has an asset (house) which will often appreciate in value and that can be sold to produce legitimate proceeds & profit.

4) Sham litigation - E.g. where there’s not a real claim so the other company doesn’t defend the claim and it is entered in default. The foreign company immediately pays the sum due to the firm. - Transferred illicit funds from abroad into the UK.

Question 5

Where are the regulations for anti-money laundering found?

Answer 5

In the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

Measures against money laundering and terrorist financing are tied together as both activities involve criminals entering into transactions with the intent of hiding the origins/destinations of the funds.

Question 6

What is the Financial Action Task Force?

Answer 6

An inter-governmental body established due to the concern at increased money laundering around the world.

This task force recommended that countries should create anti-money laundering legislation (resulting in the Money Laundering, Terrorist Funding and Transfer of Funds Regulations).

Question 7

What does it mean that the UK’s approach to money laundering is risk based?

Answer 7

The more significant measures are targeted at those situations which carry the higher risk.

Question 8

Which type of people/firms does the Regulations apply to?

Answer 8

A firm or sole practitioner
Trust/company service providers
Tax advisers
Insolvency practitioners

Question 9

What type of role does the SRA play under the Regulations?

Answer 9

Supervisory one.

The beneficial owners, officers or managers of the firm & sole practitioners must apply to the SRA for approval under the Regulations - approval MUST be granted unless the applicant has been convicted of a relevant offence (including relevant ones under the Act or any offence which has deception or dishonesty as one of its components).

Question 10

What happens if the beneficial owners, managers or officers of the firm act without the SRA’s approval?

Answer 10

This is a criminal offence and may result in a fine, imprisonment or both.

Question 11

In addition to the requirements under the Regulations, how must firms ensure they are meeting their professional conduct requirements?

Answer 11

Firms need to have structures, arrangements, systems and controls in place that ensure compliance with regulatory and legislative requirements.

They must also identify, monitor and manage material risks to the business. - Include action needed to prevent the firm from being used for money laundering or terrorist financing.

Question 12

What does a risk assessment entail for firms?

Answer 12

A firm is required to take appropriate steps to identify and assess the risk of the firm being used for money laundering.

This will entail a firm-wide risk assessment to include risk factors e.g. the services offered by the firm, how these are delivered, the nature of the firm’s clients and the industries in which they operate.

Question 13

How does the SRA get involved in risk assessments?

Answer 13

The SRA monitors compliance.

It also carries out risk assessments across legal services.

Hence, an individual firm’s risk assessment must also include the SRA’s assessments of the risks within the sector as a whole.

Question 14

Can the SRA ask to see a firm’s risk assessment?

Answer 14

Yes. SRA take a proactive approach and will take enforcement action against a firm where the risk assessment is inadequate or where the firm doesn’t have one at all.

Question 15

What are the three areas of law more susceptible to money laundering?

Answer 15

Trusts and companies services

Conveyancing

Client account services

Firms need to ensure that their risk assessment addresses the risks in these areas.

Question 16

What does a firm need to do in regards to keeping a record?

Answer 16

A firm must keep an up-to-date WRITTEN record of all the steps it has taken as part of the risk assessment.

Question 17

What is a firm required to do regarding policies, controls and procedures for anti-money laundering?

Answer 17

Must establish and maintain WRITTEN anti-money laundering policies, controls and procedures (proportionate to its size, nature and approved by senior management).

This is in order to mitigate and manage the money laundering and terrorist financing risks identified in its risk assessment.

Question 18

What types of policies, controls and procedures will be applicable for anti-money laundering?

Answer 18

• Risk management practices
• How the firm conducts client due diligence
• The firm’s reporting and record keeping systems
• Policies put in place when new technology is adopted and in relation to complex, unusually large or unusual patterns of transactions which have no apparent economic or legal purpose.

Question 19

What are the internal controls that a firm must adhere to?

Answer 19

Must appoint a ‘nominated officer’ (MLRO - Money Laundering Reporting Officer).

This person receives reports from within the firm concerning any instances of suspected money laundering and will liaise with the National Crime Agency (NCA) where needed.

Question 20

What is an MLCO?

Answer 20

Money Laundering Compliance Officer.

A firm must have one if this is appropriate to the size and nature of the firm.

The MLCO acts as the SRA’s main point of contact on all anti-money laundering issues. The role of MLCO and nominated officer can be fulfilled by the same person.

Question 21

What 2 other internal controls must the firm do?

Answer 21

1) Screen relevant employees prior to and during the course of their employment to assess their skills, knowledge, conduct and integrity.

This related to staff whose work in the firm is relevant to compliance with Regulations or who otherwise contribute towards the identification, preventing and detection of money laundering & terrorist financing.

2) Establishing an INDEPENDENT audit function to examine, evaluate, make recommendations and monitor the firm’s policies, controls and procedures adopted to comply with the Regulations.

A firm must also establish and maintain controls which allows it to respond ‘fully and rapidly’ to enquiries from law enforcement as to whether it maintains, or has maintained during the last 5 years, a business relationship with any person and the nature of that relationship.

Question 22

When do firms require due diligence for anti-money laundering?

Answer 22

When they are carrying out relevant business, firms must verify the identity of each of their clients.

Question 23

What specific circumstances would the need to verify the client’s identity arise?

Answer 23

1) Where the client and solicitor agree to form a business relationship

2) Carrying out an occasional transaction (not in the course of a business relationship) that amounts to a transfer of funds (carried out partly by electronic means by a payer through a payment service provider) exceeding €1,000.

3) Carrying out an occasional transaction that amounts to €15,000 or more (whether this transaction is executed in a single operation or in several which appear to be linked)

4) Where the solicitor suspects money laundering or terrorist financing

5) Where the solicitor doubts the veracity or adequacy of documents or information supplied to verify the client’s identity

Question 24

When must the verification take place?

Answer 24

As soon as possible after first contact and must take place before a business relationship is established or the carrying out of the transaction.

Question 25

What are the circumstances that allow a solicitor to verify the identity of the client during the establishment of a business relationship?

Answer 25

1) If there is little risk of any money laundering or terrorist financing occurring

2) It is not necessary to interrupt the normal conduct of business AND

3) The identity is verified as soon as practicable after conduct is first established.

Question 26

What happens if the solicitor is unable to complete the client due diligence in time?

Answer 26

The solicitor cannot:

Carry out a transaction with or for the client through a bank account or

Establish a business relationship or carry out a transaction otherwise than through a bank account.

They must also terminate any existing business relationship and consider making a disclosure to the NCA.

Question 27

What is standard due diligence and when does this apply to clients?

Answer 27

Standard due diligence will apply to most clients.

Solicitor is obliged to verify the identity of the client based on documents or information obtained from a reliable source which is independent from the person.

They must take reasonable measures to understand the ownership and control structure of non-natural persons such as trusts and companies.

Question 28

What type of evidence is recommended to verify natural persons?

Answer 28

Evidence of identity may be based on documents such as passports and photocard driving licenses.

Good practice to have:
1) government document which verifies either the person’s name and address or the person’s name and DOB OR

2) a government document which verifies their name and a separate supporting document which verifies their name and either their address or date of birth.

Ideally, originals of these documents should be provided - but copies is allowed when risks have been assessed.

Question 29

What is needed for non-limited liability partnerships?

Answer 29

Need to get info on the constituent individuals who make up the partnerships.

Where the partnerships are well known, reputable and have long histories in their industries and with substantial public info, Law Society states it should be sufficient to get their name, registered/trading address and nature of business.

Question 30

What is needed to verify the existence of a company?

Answer 30

The standard identifiers are:

1) Its name
2) Its company number or other registration and
3) The registered office address and principal place of business

Unless it is a company listed on a regulated market, reasonable measures are to be taken to obtain and verify the law to which it is subject, its constitution or any other governing documents and the names of the board of directors/other senior partners responsible for its operations.

Question 31

What other info is needed when it comes to companies or LLPs?

Answer 31

Proof of registration or an excerpt from the relevant register before establishing a business relationship with a UK company or LLP.

UK body corporates (listed, unlisted companies and LLPs) have to provide certain info when it forms a business relationship with a firm. This includes the info above. Also should consider whether the person providing the instructions has the authority to do this.

Question 32

What must the solicitor do regarding beneficial owners?

Answer 32

Solicitors must identify any beneficial owner where the beneficial owner is NOT the client.

Can be:
An individual who exercises ultimate control over the management of the body corporate.
Any individual who ultimately owns/controls (in each case whether directly or indirectly), including through bearer share holdings or by any other means, more than 25% of the shares or voting rights in the body corporate OR
An individual who controls the body corporate.

Doesn’t apply to a company listed on a regulated market but does apply to UK LLPs.

Question 33

What do law firms do regarding beneficial owners of parent companies?

Answer 33

Risk-based approach should be taken as to whether to make further enquiries.

Common for law firms to seek to identify the beneficial owners of parent company UP AND UNTIL the ultimate parent company.

In the case of a partnership (other than an LLP), reg 5(3) defines a beneficial owner as any individual who:
- Ultimately is entitled or controls (whether directly or indirectly) more than 25% of the capital or profits of the partnership or more than 25% of the voting rights in the partnership or

• Otherwise exercises control over the management of the partnership (the ability to manage the use of funds or transactions outside of the normal management structure and control mechanisms).

Question 34

Who are the beneficial owners in trusts?

Answer 34

• The settlor
• The trustees
• The beneficiaries
• Where the individuals benefitting from the trust haven’t been determined, the class of persons in whom the main interest the trust is set up or operates
• Any individual who has control over the trust (whether exercisable alone or with another person or with the consent of another person) under the trust instrument or law

Essential to carry this out as the trust doesn’t have a legal personality so solicitor needs to understand who the beneficial owners are.

If the beneficiary is a company, the solicitor will need to find out who the beneficial owners of that company are.

Question 35

When is simplified due diligence allowed?

Answer 35

Allowed when a firm determines, through an individual risk assessment, that the business relationship or transaction prevents a low risk of money laundering or terrorist financing, taking into account the risk assessment.

Question 36

What factors need to be considered when understanding if a client/transaction is lower risk?

Answer 36

• Whether the company is listed on a regulated market
• The location of that regulated market
• Where the client is established and does business.

Solicitor must also OBTAIN EVIDENCE that the transaction and client are eligible for simplified due diligence.

This depends on the identity of the client (and will not necessarily mean that the info of the beneficial owners of the company e.g. for a well known plc, solicitor has to obtain confirmation of the company’s listing on the Stock Exchange).

Question 37

What is enhanced due diligence?

Answer 37

Required where there is something about the arrangement/transaction which creates a HIGH risk of money laundering.

Question 38

When must enhanced due diligence be carried out?

Answer 38

1) The case has been identified as one whether there is a high risk of money laundering or terrorist financing in the firm’s risk assessment or in the info made available about the SRA and Law Society.

2) The client/counter-part to the transaction is in a high-risk third country.

3) The client has provided false or stolen identification documents or info and the solicitor has continued dealing with the client.

4) The client is a politically exposed person (PEP) or a family member/known close associate of a PEP

5) A transaction is complex or unusually large, there is an unusual pattern of transactions or the transactions have no apparent economic or legal purpose

6) In any other situation where there is a higher risk of money laundering or terrorist financing (e.g. where the business relationship is conducted in usual circumstances or payments received from unknown or associated third parties).

A solicitor must take measures - as far as reasonably possible - to examine the background and purpose of the transaction and consider whether it is appropriate to obtain further independent verification of the client or beneficial owner’s identity or more detail on the ownership, control structure and financial situation of the client.

Necessary to conduct enhanced ongoing monitoring of the business relationship.

Question 39

What types of roles are included in Politically Exposed Person?

Answer 39

Heads of state, heads of government, ministers and deputy or assistant ministers

MPs

Members of supreme courts, of constitutional courts or of other high-level judicial bodies

Members of courts of auditors or of the boards of central banks

Ambassadors and high-ranking officers in the armed forces

Members of the admin, management or supervisory bodies of State-owned enterprises.

Family members = spouse, civil partner, children, their spouses/civil partners, parents.

Known close associates = people you have close business relationships with.

Question 40

What is the new rule about domestic PEPs?

Answer 40

Though they are still needed to be subject to enhanced due diligence, they must be treated as lower risk than overseas PEPs.

Exception = if there were enhanced risk factors present.

Question 41

What additional requirements are needed of solicitors when dealing with PEPs/family members or close associates of PEPs?

Answer 41

Having senior approval management to act for the client.

Taking adequate measures to establish the source of wealth and source of funds involved in the business relationship/proposed transactions.

Conducting enhanced ongoing monitoring of the business relationship.

Question 42

What is ongoing monitoring of business relationships?

Answer 42

This ensures that transactions are consistent with the solicitor’s knowledge of the client.

Question 43

What trainings are firms required to give regarding money laundering?

Answer 43

Firms must give (and maintain a record of) training to their employees in respect of money laundering.

Should be made aware of how the law relating to money laundering, terrorist financing and data protection regulations relate to them.

Should be given regular training but the Regulations do not specify how the training should take place.

Can be face to face or through e-learning.

Question 44

What happens if training is not given regarding anti-money laundering/terrorist financing?

Answer 44

May provide the employees with a defence to some of the offences under the Proceeds of Crime Act 2002.

Question 45

What records must be kept regarding money laundering?

Answer 45

Copy of any documents/info obtained by the solicitor to satisfy due diligence requirement.

Supporting records (original copies) for transaction which is subject to due diligence measures/ongoing monitoring.

Must be kept for at least 5 years from when the business relationship ends or the end of the occasional transaction.

Question 46

Under the Criminal Finances Act, what type of offence is the failure to prevent the criminal facilitation of tax evasion?

Answer 46

Corporate offence of failure to prevent the criminal facilitation of tax evasion.

Can be guilty of this offence if there was a failure to prevent tax evasion offences by employees/other associated persons.

Includes the fraudulent evasion of VAT, income tax, NI contributions and the common law offence of cheating the public revenue.

Strict liability for the offence - no knowledge or intention is required on the part of the firm or senior management.

Question 47

What is a defence available to this offence?

Answer 47

That the firm had reasonable prevention procedures or is able to show that it was reasonable not to have had such procedures in place.

Breach = unlimited fines and confiscation of assets.

Question 48

How must firms comply with Criminal Finances Act?

Answer 48

Have to also be aware that criminal facilitation of tax evasion can be carried out by other ‘associated persons’ (e.g. agents of the firm or those who perform services for or on behalf of it) e.g. barristers, surveyors and foreign law firms.

A firm-wide risk assessment, internal procedures, staff training and ongoing monitoring will also be required.

Question 49

How does the UK financial sanctions regime work alongside the money laundering rules?

Answer 49

Serious restrictions are placed on dealing with people/entities who are on the sanctions list.

Applies to all firms whether or not they are subject to Regulations.

Requirement to inform the Office of Financial Sanctions Implementation if it is known/reasonably suspected that a person is a designated person or has committed offences under financial sanctions and asset freezing regimes.

If a firm wishes to act and the person doesn’t have a general OFSI licence, the firm must obtain an individual licence to receive reasonable fees for the provision of legal advice.

Question 50

Under ECTEA 2022, what can firms face liability for now?

Answer 50

Fines even when they have no knowledge or reasonable cause to suspect that a transaction to which they are a party is in breach of the sanctions regime.