Money Laundering Flashcards
What is money laundering?
Money laundering involves financial transactions where proceeds from serious crime (e.g. drug trafficking, terrorism, theft, tax evasion, fraud, counterfeiting or blackmail) are ‘cleaned’ so that its source is harder, if not impossible, to trace
- All solicitors and firms, and many in-house legal departments are exposed to money laundering. This is because they:
· can legitimise a transaction
· have access to financial markets
· advise on property and business deals.
What must law firms do to try and stop money laundering?
- Each law firm must nominate a money laundering reporting officer (‘MLRO’).
- All firms must have policies and procedures obliging anyone in the law firm who knows or suspects money laundering to comply with the reporting obligations set out in PoCA.
What does Reg 18 of Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘MLR’) require?
- Regulation 18 MLR requires law firms and many other businesses to identify and assess the risks of money laundering and terrorist financing to which the business is subject
- Law firms and these businesses must keep an up-to-date anti money laundering (‘AML’) written record of all the steps they have taken, ie keep an updated AML Risk Assessment document.
Who do the money laundering rules apply to?
- The rules apply to lawyers and many other people working as professionals or in business.
Nominated officers for money laundering?
- Each law firm has a Compliance Officer for Legal Practice (‘COLP’) and a Compliance Officer for Finance and Administration (‘COFA’). The COLP, COFA and the managers (i.e. the partners) of the firm are responsible for ensuring the firm takes all steps required to comply with the MLR and PoCA, to ensure an offence is not committed by the firm or any of its personnel.
- Individual solicitors will also be concerned not to commit a criminal offence under PoCA or MLR.
- Each law firm must nominate a money laundering reporting officer (‘MLRO’).
- Note that PoCA refers to the ‘Nominated Officer’ and so some law firms prefer to use that title instead.
- All firms must have policies and procedures obliging anyone in the law firm who knows or suspects money laundering to comply with the reporting obligations set out in PoCA.
four elements to money laundering?
- criminal source of the funds is disguised
- the form of the funds will be converted (often from paper bills to money in a bank account)
- the trail by which the conversion occurs will be disguised
- the launderer will retain control of the funds (directly or indirectly)
How a solicitor can be at risk of money laundering?
· A client depositing cash in the firm’s client account solely for onward transmission to a third party.
· A client acquiring property, investing in a business or buying an asset using cash which is the proceeds of crime.
· Setting up legal or transaction structures which are intended to be used for money laundering, and hide the source of the funds. Sometimes complex trust structures are set up to acquire assets for this purpose.
· A client using a firm’s client account to mix clean and dirty cash to disguise the audit trail.
* Solicitors should be careful to whom they reveal the details of their client account: launderers could deposit cash into the account without the solicitor knowing, posing a significant money laundering risk. Failure to manage a client account properly will breach the SRA Code of Conduct for Solicitors, RELS and RFLs, (‘CCS’) and the SRA Accounts Rules
Warning signs of money laundering?
instructions outside your firm’s area of expertise: beware of taking on work in which the firm has no background, but in which the client claims to be an expert;
unusual retainers: eg a dispute which settles too easily might indicate sham litigation;
use of client accounts: eg a client deposits funds in your account but ends the transaction for no apparent reason. Solicitors must not provide a banking service for their clients, so firms should only use client accounts to hold money for legitimate transactions for clients;
setting up a trust: be aware of general money laundering signs and consider if the purpose of the trust could be to launder criminal property. Ascertain the purpose of the trust and why any unusual jurisdiction or structure is being used;
property purchase: look out for large payments from private funds, especially if the client has a low income; look out for payments from a number of individuals or sources;
Suspicious fact patterns
* E.g. a seller and buyer with similar names or who give the same address;
* a seller and buyer both from a jurisdiction outside the UK;
* ‘mistakes’ regarding an overpayment to your client account;
* monies arriving from a third party who is not your client;
* your client asking you to send monies to an unknown third party;
* documents which appear to show a seller and a buyer with similar signatures;
* clients attempting to pay large sums in cash;
* offshore vehicles being made parties to a deal;
* money coming from or being requested to be sent to offshore tax havens.
* High risk jurisdictions
Instructions outside your firm’s area of expertise
Use of client accounts: for example a client depositing funds in your firm’s account but ending the transaction for no apparent reason
Clients paying large sums in cash
Money coming from or being sent to offshore tax havens
Money coming from ‘high risk jurisdictions’
Financial Action Task Force (‘FATF’)?
an inter-governmental body tasked with implementing and promoting effective measures for combating money laundering and terrorist financing. FATF publishes lists of jurisdictions with a heightened money laundering risk:
o High-Risk Jurisdictions subject to a Call for Action - June 2023 (fatf-gafi.org)
o As at June 2023, the countries on the FATF’s list are:
Democratic People’s Republic of Korea
Iran
Myanmar
High risk jurisdictions
High risk jurisdictions for money laundering?
Democratic People’s Republic of Korea
Iran
Myanmar
Afghanistan
Barbados
Burkina Faso
Cayman Islands
Democratic Republic of the Congo
Haiti
Syria
Uganda
Vanuatu
Yemen
South Sudan
Trinidad and Tobago
Tanzania
Philippines
Iran
Nigeria
Iran
Democratic People’s Republic of Korea
Partners of the law firm obligations for money laundering?
- It is the partners of the law firm who have obligations to appoint people to ensure that staff adhere to good practice and people to receive reports of money laundering. This person is often called a money laundering reporting officer, or MLRO, or also a nominated officer.
direct involvement offences for money laundering?
· S 327: concealing, disguising, converting or transferring criminal property
· s. 328 is entering or becoming concerned in an arrangement which facilitates the acquisition, retention, use or control of criminal property and
· s. 329 is acquiring, using or having possession of criminal property.
Defences to offences under · Proceeds of Crime Act 2002 (‘PoCA’)?
making an authorised disclosure and that can happen before, during or after the event. The conditions for this are set out in section 338. EG if you disclose during the offence you have to have good reason why you did not disclose before and you have to make the disclosure as soon as practicably possible. If you want to rely on a defence you must meet all the conditions.
* However the practical point to remember is that you have to make a disclosure to the MLRO or nominated officer and you have to get some form of consent.
- There is an additional defence: if the activity was outside the UK and wasn’t unlawful there – so if for example the money was from selling cannabis in a country where selling cannabis is not illegal, then you would have a defence.
Golden rule for money laundering?
if you suspect your client is trying to launder money you need to report your concern to your firm’s MLRO or nominated person: DISCLOSE, DISCLOSE, DISCLOSE.
Indirect offences under * Offences under PoCA?
if you know about, suspect or have reasonable grounds for suspecting that money laundering is happening and if you work in the regulated sector (which I will explain in a moment), you have an obligation to report your suspicions to the nominated officer or MLRO. So you can’t just turn a blind eye to it. That is in section 330 PoCA.
* This only applies in the regulated sector.
- The other offence is tipping off under section 333A. You need to make sure that in the process of reporting your concerns and waiting for clearance you do not do anything to tip off the client. You can’t tell the client for example that you are waiting for consent from your MLRO because that would alert the client and could prejudice the NCA’s investigation.
Defence to suspect or have reasonable grounds for suspecting that money laundering is happening?
need to report your concern to the MLRO and they need to decide if there are reasonable grounds for suspecting money laundering
Who do non-direct involvement offences apply to?
people working in the “regulated sector”
Authorised disclosure: s 338 PoCA?
o The authorised disclosure can be made before, during or after the solicitor carries out the prohibited act.
o Section 338(2) requires the disclosure to be before the alleged offender does the prohibited act (i.e. commits an offence under any or all of ss. 327(1), 328(1) or 329(1)). EG in the example above, before the solicitor accepts the money.
o Section 338(2A) requires the disclosure to be made during the prohibited act AND he began to do the act at a time when, because he did not then know or suspect that the property constituted or represented a person’s benefit from criminal conduct, the act was not a prohibited act, AND the disclosure is made on his own initiative and as soon as it is practicable for him to make it.
o Section 338(3) requires the disclosure to be made after the prohibited act AND there is a good reason for the solicitor’s failure to make the disclosure before he did the act AND the disclosure is made on his own initiative and as soon as it is practicable to make it
When can authorised disclosure be made before the prohibited act?
Section 338(2) requires the disclosure to be before the alleged offender does the prohibited act (i.e. commits an offence under any or all of ss. 327(1), 328(1) or 329(1)).
When can authorised disclosure be made during the prohibited act?
Section 338(2A) requires the disclosure to be made during the prohibited act AND he began to do the act at a time when, because he did not then know or suspect that the property constituted or represented a person’s benefit from criminal conduct, the act was not a prohibited act, AND the disclosure is made on his own initiative and as soon as it is practicable for him to make it
When can authorised disclosure be made after the act?
Section 338(3) requires the disclosure to be made after the prohibited act AND there is a good reason for the solicitor’s failure to make the disclosure before he did the act AND the disclosure is made on his own initiative and as soon as it is practicable to make it
Disclosure to a nominated officer?
o Section 338(5) says a ‘disclosure to a nominated officer’ is a disclosure which:
(a) is made to a person nominated by the alleged offender’s employer to receive authorised disclosures, and
(b) is made in the course of the alleged offender’s employment”.
Direct involvement offences: other defences?
making a s 338 disclosure AND (if the s 338 disclosure was made before the prohibited act) having the appropriate consent; OR
not making a s 338 disclosure but having a reasonable excuse for not doing so; OR
the prohibited act is in carrying out a function the individual has relating to the enforcement of any provision of PoCA or any other enforcement relating to criminal conduct or benefit from criminal conduct.
o Under ss 327(2A) / 328(3) and 329(2A), there is also no offence committed if the criminal conduct which makes the property in question criminal property, took place outside the UK and was not unlawful in the territory in which it took place (and is not the subject of an order made by the Secretary of State).
‘Regulated sector’?
‘Regulated sector’ is defined in Schedule 9 of PoCA. It contains a list of different businesses and activities, including insurance companies, investment services, accountancy services, insolvency practitioners and providing tax advice. The regulated sector also includes:
* ‘participating in financial and real property transactions concerning:
o the buying and selling of real property or business entities
o the managing of client money, securities or other assets,
o the opening or management of bank, savings or securities accounts;
o the organisation of contributions necessary for the creation, operation and management of companies;
o the creation, operation or management of trusts, companies or similar structures by a firm or sole practitioner who by way of business provides legal or notarial services to other persons’
A lot of legal work falls within ‘participating in financial and real property transactions’
failure to disclose?
o Under s 330, it is an offence to fail to make a disclosure to the firm’s MLRO or the National Crime Agency (‘NCA’) - the body authorised to receive money laundering reports under PoCA – if:
(a) you know or suspect, or have reasonable grounds to know or suspect, that someone is laundering the proceeds of any criminal conduct;
(b) you receive the information in the course of business in the regulated sector; and
(c) you can identify the person who is laundering the proceeds of criminal conduct OR the whereabouts of the laundered property OR that the information referred to in (b) above will or may assist in identifying the person referred to at (a) above.
What must disclosure contain?
- Section 330(5) details what the disclosure must contain:
o a) the identity of the person who you know / suspect is laundering the proceeds of criminal conduct; AND
o b) the whereabouts of the laundered property if you know it; AND
o c) the information on which your knowledge / suspicion is based.
When can you start working again after disclosing to MLRO?
If the MLRO decides to make a disclosure by way of a suspicious activity report (SAR) to NCA, under s 336 PoCA, neither the MLRO nor the fee earner should authorise or undertake any prohibited act unless:
* authorised to do so by NCA; or
* seven working days has passed from the disclosure to NCA during which time NCA has not refused authority to proceed
How long does it take for the NCA (national crime agency) to grant a defence against money laundering (disclosure)?
NCA has seven working days
What happens if the NCA send a request for further information?
If the NCA sends you a request for further information, you should respond as soon as possible. Consent may be refused within two working days of the information request if you do not reply.
‘Deemed consent’?
if after seven working days you:
receive a letter from the NCA via SAR Online granting consent
receive a letter in which the NCA neither grant nor refuse consent
do not hear back from the NCA at all
What happens if your request for defence against money laundering (disclosure) is refused?
A 31-day moratorium period will begin if your DAML request is refused within the seven-day notice period.
You must not carry out the prohibited act(s), but you can carry out other activities on the file.
penalties for the offences under PoCA?
imprisonment or a fine or both
o A person guilty of an offence under section 327, 328 or 329 is liable-
a) on summary conviction to imprisonment for a term not exceeding six months or to a find not exceeding the statutory maximum or both, or
b) on conviction on indictment, to imprisonment for a term not exceeding 14 years or to a fine or to both.
o A person guilty of an offence under section 330, 331 or 332 is liable-
a) on summary conviction to imprisonment for a term not exceeding six months or to a find not exceeding the statutory maximum or both, or
b) on conviction on indictment, to imprisonment for a term not exceeding five years or to a fine or to both.
Who do the Money Laundering Regulations 2017 (MLR) apply to?
independent legal professionals
a firm or sole practitioner who by way of business provides legal or notarial services to other persons, when participating in financial or real property transactions concerning—
* (a)the buying and selling of real property or business entities;
* (b)the managing of client money, securities or other assets;
* (c)the opening or management of bank, savings or securities accounts;
* (d)the organisation of contributions necessary for the creation, operation or management of companies; or
* (e)the creation, operation or management of trusts, companies, foundations or similar structures,
Standard CDD?
o at the outset you need to identify the customer and verify their identity.
So you need to get proof of what they have told you.
* If they are an individual, take a copy of their passport for example.
* If the client is a company you will also need to identify the beneficial owner of the company.
* Beneficial owner is defined in the MLR but what it means is the person who owns or has control of that entity.
o That is defined in regulation 5 MLR and essentially the beneficial owner is anyone who owns or controls MORE THAN 25% of the shares in the company.
* You also need to think about ongoing monitoring of the business relationship and that means ensuring that the identification documents you have remain correct and up to date.
Simplified CDD?
if there is a low risk of money laundering, the MLR let you adjust the extent of the checks according to the level of risk
When do you carry out enhanced CDD?
what you carry out if you think there is a high risk of money laundering (eg it involves a high risk country) or you have suspicions of money laundering.
When can you rely on someone else’s CDD?
o A client can terminate their retainer with a solicitor at any time and for any reason. If a client has instructed a solicitor to do the type of work that falls within MLR and part way through the transaction instructs another solicitor to take over the matter, the second solicitor might be able to rely on the CDD undertaken by the first solicitor (Regulation 39).
o To be able to do this:
the second solicitor must obtain all the information needed to satisfy MLR;
the second solicitor must enter into a written agreement with the first solicitor (referred to as the “third party” defined in Regulation 8) which enables the second solicitor to obtain from the third party immediately on request (or at the latest within two working days) copies of any identification and verification data and any other relevant documentation on the identity of the customer or its beneficial owner; and
requires the third party to retain copies of the data and documents for a specific period.
o In the UK you can only rely on CDD carried out by limited classes of people. These include:
a credit or financial institution which is authorised under FSMA 2000;
auditors;
insolvency practitioners;
external accountants and tax advisers;
independent legal professionals (for example, solicitors)
* Even if you rely on another person’s due diligence, you remain liable for the client not being properly checked for money laundering purposes. Therefore in practice, most law firms will actually prefer to undertake their own CDD. In addition, CDD needs to be risk-based and most larger law firms are unhappy to rely on a third party’s assessment of risk.
General rule for CDD?
always carry out CDD before you do anything for the client, so before you undertake any work for the client
Who does MLR apply to?
Credit institutions
Financial institutions
Auditors, insolvency practitioners, external accountants and tax advisors
Independent legal professionals
Trust or company service providers
Estate agents
High value dealers
Casinos
Lawyers most commonly fall within the categories of ‘independent legal professionals’ and ‘trust or company service providers’.
Trust or company service providers?
o MLR also apply to ‘trust or company service providers’ which, under Regulation 12(2) means:
a firm or sole practitioner who by way of a business provides any of the following services to other persons:
* (a) forming companies or other legal persons;
* (b) acting or arranging for another person to act (i) as a director or secretary of a company (ii) as a partner in a partnership (iii) in a similar position in relation to other legal persons;
* (c) providing a registered office, business address or correspondence or administrative address or other related services for a company, partnership or any other legal person or arrangement;
* (d) acting or arranging for another person to act as (i) a trustee or an express trust or similar legal arrangement or (ii) a nominee shareholder for a person other than a company whose securities are listed on a regulated market.
Occasional transaction?
Occasional transaction’ is defined term in Regulation 3 MLR as a transaction which is not carried out as part of a business relationship, i.e. a ‘one-off’ transaction.
Under Regulation 27(1)(b), CDD must be applied if the occasional transaction exceeds 1,000 euro, whether the transaction is carried out in a single operation or several operations which appear to be linked.
