4 - Money Laundering

Question 1

What is money laundering?

Answer 1

Financial transactions where proceeds from seious crime (e.g., drug trafficking, terrorism, theft, tax evasion, fraud etc.) are cleaned so that its source is harder, if not impossible, to trace.

Can involve receiving or benefitting from the small proceeds of a relatively minor crime.

Question 2

How are solicitors and firms exposed to money laundering?

Answer 2

They can:
- Legitimise a transaction.
- Have access to financial markets.
- Advise on property and business deals.

Question 3

Which nominated officers in law firms are responsible for compliance with MLR regulations?

Answer 3

Compliance Officer for Legal Practice (‘COLP’) and a Compliance Officer for Finance and Administration (‘COFA’). The COLP, COFA and the partners of the firm are responsible for ensuring 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’).

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.

Question 4

What is the money laundering risk assessment?

Answer 4

Regulation 18 MLR - Relevant persons ( law firms and many other businesses) take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which the business is subject.

Must keep an up-to-date anti money laundering (‘AML’) written record of all the steps they have taken

Question 5

What are the four elements to money laundering?

Answer 5

1. Criminal source of the funds is disguised
2. The form of the funds will be converted (often from paper bills to money in a bank account)
3. The trail by which the conversion occurs will be disguised
4. The launderer will retain control of the funds (directly or indirectly)

Question 6

How can a solicitor be at risk of ML?

Answer 6

• A client depositing cash in the firm’s client account solely for onward transmission to a third party.
• A client acquiring an asset using cash poceeds of crime.
• Setting up legal or transaction structures inded to be used for ML, and hide the source of funds.
• Client using firm’s client acount to mix clean and dirty cash to disguise audit trail.

Solicitors should be careful to whom they reveal clint account details: launderers could deposit cash without the solicitor knowing. 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

The client is the person who pays you.

Question 7

Which two pieces of legislation are relevant to law firm ML compliance?

Answer 7

Proceeds of Crime Act 2002 (‘PoCA’), and

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

Question 8

What are the warning signs that ML might be about to take place?

Answer 8

• Instructions outside of the firms expertise: areas where the client claims to be an expert.
• Ususual retainers: e.g., a dispute which settles too easily.
• Use of client accounts: e.g., a client deposits funds in your account but ends the transaction for no apparent reason. Firms should only hold money for legitimate transactions for clients.
• Setting up a trust: consider the purpose of the trust and whether it could be used to launder criminal property.
• Property purchase: large payments from private funds, or several sources, especially if the client has a low income.

Question 9

Name suspicious fact patterns which suggest ML may take place

Answer 9

• Seller and buyer with similar names or who give the same address;
• 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.

Question 10

What is the role of The Financial Action Task Force (‘FATF’)

Answer 10

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, which currently includes:
- Korea
- Iran
- Myanmar

Question 11

Which countries have the European Commission identified as high risk?

Answer 11

Afghanistan, Barbados, Burkina Faso, Cameroon, Democratic Republic of the Congo, Gibraltar, Haiti, Iran, Jamaica, Mali, Mozambique, Myanmar, Nigeria, North Korea, Panama, Phillippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Trinidad & Tobago, Uganda. United Arab Emirates, Vanuatu, Vietnam, Yemen

Question 12

What are the direct involvement ML offences under PoCA?

Answer 12

Applies to everyone. Direct involvement offences are:

S 327: concealing, disguising, converting or transferring or removing criminal property from the UK (defined in s340(3) PoCA).

s. 328: entering or becoming concerned in an arrangement which you know or suspect facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person

s. 329: acquiring, using or having possession of criminal property.

Question 13

What are the defences to direct involvement ML offences under PoCA?

Answer 13

Section 338 - Authorised disclosure.
‘A disclosure to a nominated officer by the alleged offender that property is criminal property’ and at least one of s 338(2), (2A) or (3) has to be satisfied.

Making a s 338 disclosure AND (if the s 338 disclosure was made before the prohibited act) having the appropriate consent; OR

Having a reasonable excuse for not making a s338 disclosure.

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.

Under ss 327(2A) / 328(3) and 329(2A), there is no offence if the activity was outside the UK and wasn’t unlawful there.

Question 14

What must disclosure contain for non-direct ML offences?

Answer 14

Section 330(5):
a) the identity of the person who you know / suspect is laundering the proceeds of criminal conduct; AND
b) the whereabouts of the laundered property if you know it; AND
c) the information on which your knowledge / suspicion is based.

Question 15

At what point can the authorised disclosure of ML take place?

Answer 15

The authorised disclosure can be made before, during or after the solicitor carries out the prohibited act.
Section 338(2) - Before
Section 338(2A) - During the prohibited act, and at a time when he did not suspect ML. Disclosed on his own initiative as soon as practicable.
Section 338(3) - After, with good reason for the solicitors failure to disclose, on his own initiative as soon as practicable.

Question 16

What are the non-direct ML offences under PoCA ?

Answer 16

Applies only to people working in the regulated sector, ‘participating in financial and real property transactions’.

Section 330 PoCA - Even if you were not directly involved in money laundering:
(a) if you know about, suspect or have reasonable grounds for suspecting that money laundering is happening and if you work in the regulated sector,
(b) receive information in the course of business in the regulated sector,
(c) can identiy the person who is ML, the whereabouts of the laundered property,
You have an obligation to report your suspicions to the nominated officer or MLRO.

Section 330A PoCA - You must not tip off the client when waiting for clearance.

Question 17

What happens after you disclose suspected ML?

Answer 17

If the MLRO suspects money laundering they will report the concern to the national crime agency or NCA and you will need to wait until you get clearance from the NCA.

Question 18

What does the ongoing monitoring of a business relationship include?

Answer 18

A relevant person must conduct ongoing monitoring of a business relationship including:

• scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the law firm’s knowledge of the customer, the customer’s business and risk profile; and
• undertaking reviews of existing records and keeping the documents or information obtained for the purpose of applying CDD measures up-to-date.

In addition, where enhanced CDD is required, under Regulation 33(5)(d) a relevant person must:

• Increase the monitoring of the business relationship, including greater scrutiny of transactions.

Question 19

What are the penalties for offences under PoCA?

Answer 19

Section 334 -
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.

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.

Question 20

When does the MLR require Customer Due Diligence measures?

Answer 20

Under Regulation 27 - The MLR require regulated businesses to identify and verify the identity of their clients.

You should carry out CDD when you establish a business relationship, carry out an occasional transaction, suspect money laundering or doubt the veracity or adequacy of the identification documents you have.

Question 21

When is a business relationship established?

Answer 21

Defined in Regulation 4(1) MLR and means that, at the outset of a matter, it looks like an ongoing relationship will be set up with the client.

Question 22

When is a firm carrying out an occasional transaction?

Answer 22

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.

Question 23

What is standard CDD and when must organisation conduct this?

Answer 23

If at the outset of a deal any work being done for a client falls within MLR, a standard CDD must be conducted.

It requires relevant persons to:
Identify the customer and verify their identity on the basis of documents/data received from a reliable and independent source and assess, and where appropriate, obtain information on, the purpose and intended nature of the business relationship or transaction;

Where the customer is a company, identify its name, company number, the address of its registered office and if different, its principal place of business, the law to which it is subject, its constitutional documents, the names of the directors or members of its management body and senior management.

Identify the “beneficial owner”: the person who owns or controls the customer on whose behalf the work is being undertaken. For example if the client is a private limited company, the solicitor would have to identify any individual who owned or controlled more than 25% of the voting rights in the company and then take sufficient measures to verify his or her identity.

Ongoing monitoring of the business relationship, e.g. ensuring any documentation/data/information held is up to date.

Question 24

When must customer due diligence be carried out on a beneficial owner?

Answer 24

Under Regulation 28(4) MLR where the customer is beneficially owned by another person, (eg the customer is a company, trust or partnership), you must carry out CDD on the ‘beneficial owner’. You must also take measures to ‘understand the ownership and control structure of the person, trust or arrangement’.

For a company not listed on a regulated market, the beneficial owner is the individual who owns or controls more than 25% of the shares or voting rights in the entity or who otherwise exercises control over the management of the entity, (Regulation 5(1)). Cannot rely on the PSC register for this.

Question 25

What is enhanced CDD and when must organisations conduct this?

Answer 25

Where there is a higher risk of money laundering, organisations should conduct enhanced CDD in addition to the customer due diligence measures required under regulation 28 and 29.

Regulation 33
Under Regulation 33(1) enhanced CDD and enhanced ongoing monitoring must be carried out to manage the risks in the following circumstances:

(a) Where there is a high risk of money laundering or terrorist financing;
(b) in any transaction or business relationship with a person established in a high-risk third country;
(c) in relation to correspondent relationships;
(d) if a relevant person has determined that a customer or potential customer is a PEP, or a family member or known close associate of a PEP.

A “PEP” is a “politically exposed person” i.e. someone who has been entrusted with a prominent public function – they generally present a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence they may hold.

Question 26

What level of enhanced CDD must organisations conduct?

Answer 26

It must include, as far as reasonably possible:
examining the background and purpose of the transaction,

increasing the degree and nature of monitoring of the relevant relationship to determine whether the transaction or relationship appear suspicious,

getting additional independent, reliable sources to verify information,

taking additional measures to understand the background and financial situation of the customer and other parties to the transaction and taking further steps to be satisfied the transaction is consistent with the purpose and intended nature of the relationship, and

taking further steps to be satisfied the transaction is consistent with the purpose and intended nature of the relationship.

Question 27

What do organisations examine during enhanced CDD in a high-risk third country?

Answer 27

If Enhanced CDD is to be applied due to a party to the transaction being established in a high-risk third country, it must include: obtaining additional information on:

• the client and the client’s beneficial owner
• the intended nature of the business relationship
• the source of funds and source of wealth of the client and of the client’s beneficial owner
• the reasons for the transactions
• obtaining the approval of senior management of the practice for establishing or continuing the business relationship, and
• conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied and selecting patterns of transactions that need further examination.

Question 28

What is simplified CDD and what does it entail?

Answer 28

Where the risk of money laundering is low, you may conduct simplified CDD by adjusting the type of CDD measures you conduct. You must continue to monitor the relationship to enable you to detect any unusual or suspicious transactions.

Question 29

What are the risk factors under simplified CDD?

Answer 29

The risk factors under regulation 37(3) include:

Customer risk factors including whether the customer is a:

• public administration (eg local authority)
• publicly owned enterprise
• financial or credit institution
• a company listed on a regulated market (eg the London Stock Exchange)
• an individual resident in a geographical area of low risk the product or service they want advice on must also be low risk (e.g., a pension or endowment policy)..

(b) Product, service, transaction or delivery channel risk factors including whether the product or service is eg

• a life insurance policy with a low premium
• a pension scheme which meets certain prescribed conditions
• a child trust fund
• a junior ISA.

Question 30

When does CDD have to take place?

Answer 30

Generally CDD should take place before the establishment of the relationship/carrying out of the transaction, but it can be carried out during establishment of the business relationship where there is a low risk of money laundering.

Question 31

Can a second solicitor rely on the CDD undertaken by the first solicitor?

Answer 31

In some circumstances you can rely on the CDD carried out by a third party, but you will be liable for the third party’s failure to comply with MLR.

Question 32

How long does the relevant authority have to review a suspicious activity report?

Answer 32

A financial institution is required to file a suspicious activity report no later than 30 calendar days after the date of initial detection of facts that may constitute a basis for filing a suspicious activity report.

7 working days to decide whether to grant a
Defence Against Money Laundering (DAML)