Spotting the red flags: A robust approach to AML

The threat of money laundering
Organised crime costs the UK more than £24 billion each year - that's £1 a day per citizen. The fact that criminals are using the services of legal professionals in order to hide the origins of their illicit funds is nothing new, but there are important questions that solicitors must ask themselves to avoid becoming drawn in without their knowledge. Are you conducting the proper due diligence to spot the tell-tale signs of money laundering? Are you fully knowledgeable about the process required to report such activity if you do have suspicions?

Sophisticated organised criminals are likely to have built what appears to be an authentic business to avoid unwanted scrutiny and this makes you and your profession vulnerable to becoming unwittingly involved in serious and organised crime. For solicitors, the consequences of being involved in money laundering, whether wittingly or not, are severe. These can range from loss of your practising certificate, damage to your own and your business' reputation, significant fines and even a prison sentence. The creation of the Participation Offence in the Serious Crime Act 2015 also makes it a crime - punishable by up to five years in prison - to participate in activities which an individual 'reasonably suspects' contribute to organise crime.

With this in mind, it is imperative that we take our responsibility to comply with money laundering regulations seriously, particularly the obligation to complete adequate due diligence on new and existing clients. By doing your due diligence and submitting Suspicious Activity Reports (SARs), solicitors act as 'guardians at the gate' - identifying potential cases of money laundering before they enter the economic system.

If you do come across suspicious activity, by highlighting your concerns to relevant officials, such as your Money Laundering Reporting Officer (MLRO) and the National Crime Agency, we can protect the whole profession from being exploited.

Through SARs, solicitors help law enforcement agencies to build a case against serious and organised criminals, and ultimately to disrupt the money laundering threat. There is also a legal obligation to report suspicious activity, according to the Proceeds of Crime Act 2002.

Spotting the red flags

But we are lawyers, not detectives, and only have limited resources to put towards identifying suspicious activity.

The most effective way to ensure that we remain compliant and are able to spot the red flags of money laundering is to implement an effective and well-documented risk-based approach. This will not only protect your firm from criminals, but in the unfortunate event that there is an issue it will also reassure law enforcement and the regulator that you took the appropriate precautions.

As a first step, we would recommend simply stepping back and considering whether there are any immediately apparent reasons not to trust a client. By considering whether there are inconsistencies in the information they provide, unusual amounts or sources of funds, or any discrepancies in previous transactions, we can begin to assess whether there is any suspicious activity that could ultimately lead to them becoming implicated in a crime.

In order to identify these red flags, firms should always undertake comprehensive due diligence checks for a new client during the initial stages of a relationship in order to sweep for any preliminary risks. Conducting internet searches on a prospective client can help to pick up any obvious warning signs with regards to their professional credibility. But due diligence extends beyond obtaining a passport and utility bill. It should be risk based and may include scrutiny of all beneficial owners with a controlling interest of over 25 per cent, in addition to the client.

Due diligence should also not be focused solely on new and prospective clients. Aside from the legal obligation - the Money Laundering Regulations 2007 require that organisations keep their due diligence up to date - clients' needs change over time and so periodic review is a professional obligation as well as a legal requirement. It must be remembered that an existing relationship does not mean that a client is exempt from wrongdoing, and it is imperative that we seek regular clarification from our clients in order to ensure that there is no unlawful activity.

Asking the right questions

A solicitor approached by a potential client that differs from their normal client profile should always ask 'why me?', regardless of the size of their firm. If a client is atypical of the regular client demographic, whether due to factors such as scale, sector, jurisdiction or any other reason, we should establish why our firm has been approached.

If something doesn't stack up, asking a direct question is usually the most efficient way to get to the bottom of the irregularity. If the client is subsequently evasive, or if the answer is vague and lacks detail, that should trigger suspicion.

One particularly effective way to assess whether a business is legitimate or not is to, if possible, make a visit to their premises during normal working hours. Often a lot can be taken from an organisation's place of business that helps to reveal how authentic it is and allows us to make judgments on the accuracy of the information they are providing. For instance, if a firm is asked to work on behalf of a retail outlet that is empty at peak time, this could indicate that all is not as it seems.

Taking action

Ultimately, if any of your due diligence checks call the credibility of the client into question, you should ask yourselves if this amounts to suspicious activity. If it does, we have a legal obligation to submit an SAR in line with internal procedures.

Submitting an SAR is often seen as a much more drastic move than it should be, and submitting an SAR can be a concern for legal professionals. We are trained to maintain the highest levels of client confidentiality, so there is often apprehension that if the information we have is vague or imprecise, it may appear as if we are taking an extreme step without possessing the requisite evidence. However, it should always be remembered that submitting an SAR is confidential. If you're uncertain how to act, remember that your MLRO will be able to provide guidance, and best practice materials are available from The Law Society of England and Wales. The Solicitors' Assistance Scheme can also provide a free hour of advice from someone experienced in the field.

Critically, if an SAR is not submitted when there are grounds to, solicitors risk breaking the law under the Proceeds of Crime Act 2002, and potentially allowing criminals to get away with the proceeds of their wrongdoing. Legal professionals should be aware that an SAR can provide that final piece of the jigsaw puzzle of an ongoing investigation that enables law enforcement to intervene to disrupt criminal activity.

Playing it safe

It is quite simply not worth that risk to turn a blind eye to any red flags or discrepancies that are thrown up in the course of due diligence, no matter how minor they may appear to be. Having the correct processes in place to enable scrutiny of clients on both an initial and ongoing basis, as well as a keen understanding of when to submit an SAR, are key to ensuring that solicitors are sufficiently equipped to deflect the potential threat of money laundering.

Illustrating the risk

The changing commercial scene affords opportunities for money launderers and lawful business men alike to retain solicitors to help advance their enterprise. The key thing for solicitors is to recognise the difference. At times this can be challenging, especially where what looks like an everyday transaction is in fact at the very edge of compliant behaviour.

For years solicitors have provided escrow facilities to clients. Typically this is in connection with routine conveyancing transactions or in the winding up of estates for probate purposes. Recently solicitors have been approached to provide a facility via client account to enable purchasers of particular types of investments (typically unregulated by the FCA) to lodge their purchase monies there whilst the sale of the investment is completed with funds being released on completion. Sounds like a conveyancing transaction? Well, that is precisely the argument the solicitor's counsel advanced before the SDT and the High Court on appeal, and lost.

In Premji Naram Patel v SRA [2012] EWHC 3373 (Admin) the Court found that although this process had some characteristics akin to conveyancing, in fact the touchstone was whether the solicitor was really acting in a full sense in an 'underlying transaction' (see rule 14.5 SRA Accounts Rules, 2011). The more tenuous the connection to an underlying transaction the more likely you are to be regarded as furthering money laundering. In Mr Patel's case and in others we have seen, the only connection is to sign off a form pre-populated with details of the transaction by the unregulated referrer of the high net worth purchasers. All this in return for 1 per cent of the cash flowing through client accounts related to the transaction. Very often this begins with cash from such sources amounting to £1m per month but often escalates, providing the solicitor with a significant hike in fee income and setting alarm bells ringing at the SRA as they read the annual returns of turnover through your client's account showing a huge increase in cash. The SRA have published useful guidance on the subject, which can be found on their website.

It is crucial to ensure that the training provided by your firm to your fee-earners (qualified and unqualified) and cashiers covers these issues regularly as new examples are constantly coming to light.

One aspect to this issue which is not often highlighted is the fact that the so-called investments are said to be unregulated by the FCA. This is not necessarily the FCA's view. In our experience this leads to raids by both the SRA and the FCA. Although the SRA are entitled to look at client files, bear in mind that the FCA have to overcome issues arising from legal professional privilege and the law of confidentiality before they can view every document your firm holds. This can lead to many hard fought battles before a sensible inspection programme is agreed.

Tony Guise is director of Guise Solicitors (www.guisesolicitors.co.uk)