Why lawyers are a crucial line of defence for tackling money laundering

Scales being balanced with coins
Risk assessment: legal firms are the first line of detection in keeping business clean Credit: getty

Smart fraudsters are testing firms and it's the responsibility of lawyers to step up to the anti-money laundering front line.

Law firms connect all sorts of operations to their financial or business partners. Unfortunately, they also provide one of the vital junctions where crooks aim to disguise themselves to infiltrate the above-board economy.

Serious and organised crime, which costs the UK economy an estimated £24bn annually, also has a human cost, as money laundering is an adjunct to terrorism, people-smuggling, drug dealing and other criminal activity. By thwarting money laundering, criminals are denied access to the fruits of their crimes.  

That is why the spotlight is now increasingly on the role of lawyers who may be at risk of being deceived into facilitating money laundering. As the Solicitors Regulation Authority has warned: “Law firms are one of the key targets for those wishing to launder money.”

Compliance with money-laundering obligations is one of the greatest challenges for solicitors in the UK today

The Law Society acknowledges that, with the evolving threat, compliance with money-laundering obligations is one of the greatest challenges for solicitors in the UK today.

Scott Devine, the society’s policy adviser for anti-money laundering, says: “Money laundering can appear in numerous forms, from international criminal organisations and the proceeds of overseas corruption through to smaller-scale laundering by local drug dealers.

“Hence, large firms, small firms and all those firms in between are at risk of being targeted by would-be money launderers. It is important that all firms, regardless of their size, conduct a firm-wide money-laundering risk assessment to ensure they are aware of the specific risks relating to the services they undertake and a thorough risk assessment of any clients requesting legal services subject to the Money Laundering Regulations 2007.”

A key component of a firm-wide risk assessment is identifying which areas of the business could currently be exploited – for example, relaxing due diligence on established clients and practical strategies to strengthen any weak points.

Legal firms can express their professionalism in the highest sense by demonstrating that they are the first line of detection in keeping business clean.

It is a highly demanding responsibility. While law students may not have necessarily listed doing due diligence as the most exciting reason for entering the profession, the legal reality now is that the call to become active in the fight against money laundering is an integral part of their wider professional and ethical responsibilities.

An evolving threat

The big danger is that lawyers could underestimate the risk of being caught up in a money-laundering scam, especially if they operate at the smaller end of the scale, with a reputation for probity and a roster of highly respectable clients.

It might be thought it would be easier for dirty deals to be laundered through big City firms with a huge workload, or through a dubious firm with which a criminal is already in cahoots.

Sadly this is not the case. Money laundering is a scourge on professional services at all ends of the spectrum and occurs through both new and established clients.

Most big City law firms are now very much aware of the risks they face and almost invariably have sophisticated compliance systems in place. Under Regulation 20 of the Money Laundering Regulations 2007, lawyers must put in place rigorous systems and procedures to ensure they are not used as conduits in facilitating criminal activity.

Firms must be on the lookout for suspicious activity

It is a challenge for SMEs to allocate such resources to their work – but for even the smallest firms, attention to detail can be the difference between catching a criminal and becoming embroiled in their misdeeds. It is worth the effort, as without sufficient training and guidance every firm’s most precious attribute – its good name – could be in peril.

Nigel Kirby, deputy director of the National Crime Agency (NCA) economic crime command, says: “Most businesses comply with legislation and regulation, and play an important role in tackling money laundering. However, professionals can mitigate the risk of being unwittingly involved through proper compliance and due diligence checks, and by having a good awareness of money-laundering indicators.”

Firms must be on the lookout for suspicious activity and have in place a nominated person as their money-laundering reporting officer (MLRO), who has the responsibility of alerting the authorities if their suspicions are aroused.

Being an MLRO can be demanding and the Solicitors Regulation Authority emphasises that the nominee should have sufficient seniority to encourage reporting of suspicious activity. That means that they can assess the risk of money laundering posed by the firm’s work and know the criteria regarding when to make a suspicious activity report (SAR) and when to stop acting for the client.

More and more SARs come in each year, with the NCA currently receiving more than 380,000 SARs annually. With so many reports, it is important that firms provide as much detail on who, what, when, why, how and where their suspicions were raised. Sometimes it needs multiple SARs about a client to piece together a rounded picture of what is going on.

Failure to flag such activity can result in prosecution and potentially serious criminal penalties even for unwitting involvement. There is a risk that an existing relationship could evolve, with criminal activity taking place after initial due diligence on a client is completed. Mr Kirby says that this is why due diligence is a continuing process.

Due diligence is an investment and a necessary safeguard for every firm. Ashmans Solicitors, based in Dewsbury, West Yorkshire, says: “Being faced with charges of money laundering will be extremely upsetting and worrying for you. You will also have to consider the consequences for you and your business too, and these may be massive.”

How do criminals launder funds?

SAR analysis has shown that the legal sector is vulnerable to criminals using solicitors to set up offshore companies and move money via client accounts, using firms to add an additional layer of complexity and respectability to their transactions

Criminals seek the assistance of accountants as well, to launder money via corporate vehicles and conceal the true ownership of property in mortgage applications, as well as facilitate tax evasion and VAT fraud.

Though few and far between, complicit criminal professional enablers can construct complex transactions, advise on jurisdictions with weak anti-money-laundering regimes, provide details on accessing tax havens and advise on the investment of criminal money without attracting attention.

Contact the Law Society

To help law firms meet their responsibilities, the Law Society operates a free and confidential helpline service on a range of anti-money-laundering topics, including customer due diligence, sources of funds, high-risk jurisdiction lists and much more. It also publishes a regular anti-money-laundering newsletter. If you have not done so maybe you should check it out now.

The Law Society's AML hot line number is 020 7320 9544  or visit www.lawsociety.org.uk and nationalcrimeagency.gov.uk

Know the risks from money launderers

The UK’s professional services companies are being targeted by money launderers, who use legitimate firms to bring the proceeds of serious and organised crime into the economy, investing it further into criminality and undermining the integrity of UK financial institutions and markets.

The Home Office is working with professional services firms through its Flag It Up! campaign to help honest enterprises avoid becoming enablers of crime.

Visit tgr.ph/homeoffice for more information about the dangers of money laundering and the steps being taken to combat it.

You can find further information on how to submit a suspicious activity report on the NCA website, and regulatory guidance is available on the Law Society’s anti-money laundering page.

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