Money Laundering

Question 1

List and briefly explain the three stages of money laundering.

Answer 1

1) Placement - money from criminal activity introduced into financial system;
2) Layering - money stanched from criminal activity by passing it through a number of parties/ transactions ;
3) Integration - money is integrated back into the financial system, with the criminal being in possession of the laundered money.

Question 2

List the elements of legal work/ services most at risk of money laundering.

Answer 2

1) Company and Trust work;
2) Use of firm’s Clint account;
3) Real Estate Work;
4) Sham Litigation.

Question 3

Explain how company/ trust work can be used to facilitate money laundering.

Answer 3

• Trusts and companies are often complex legal entities.
• Setting them up can mean money can be hidden behind complex structures and ownership models.

Question 4

Explain how a client account can be used for money laundering purposes.

Answer 4

• Allows illicit money to be swapped for clean money.
• Eg client sends 500k to solicitors client account for a purchase of a company. A few weeks later they phone solicitor and say they don’t want to go ahead with the purchase, and asks them to send it to a different account (often outside the jurisdiction). This is a classic example of a client account be used to launder money.

Question 5

Explain how a real estate work can be used to facilitate money laundering.

Answer 5

Client will send money to a client account for property purchase. Once purchase is complete, they will own the asset which they can sell to obtain clean money (in place e of the illicit money first used to purchase the property).

Question 5

To whom do the money laundering regulations (Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/ 692)) apply?

Answer 5

• They apply to persons acting in the course of business carried out in the UK.
• This includes independent legal professionals, which is defined as:
  ‘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’.
• Trust or company service providers tax advisers and insolvency practitioners are also bound by the regulations.

Question 6

Is failure to comply with money laundering regulations a criminal offence?

Answer 6

Yes.

Question 7

Explain the duty of a firm to conduct a risk assessment for money laundering purposes (and to comply with the anti-money laundering legislation).

Answer 7

• Risk assessment must be undertaken by firms to identify and assess risk of the firm being used for money laundering.
• This includes firm wide assessment, using risk factors such as the suffices offered, nature of client and the industries which those client’s operate in.
• SRA monitors such compliance and they issue general risk factors which the individual firms risk assessment must also consider and account for.
• SRA can ask to see a firm’s risk assessment, and take enforcement action where it is inadequate or has not been done.

Question 8

Explain the significance of the Government National Risk Assessment 2020.

Answer 8

• Identified legal services most likely to be subject to money laundering.
• These were company and trust work, real estate and client account services.
• Firm’s must take these into account within their risk assessment.

Question 9

Is a firm required to keep a record of risk assessments?

Answer 9

Yes.

A firm is required to keep an up to date written record of all steps taken in terms of the risk assessments undertaken.

Question 10

Explain the requirements of an anti-money laundering policy.

Answer 10

• Required to be kept by the firm;
• The policy must be written and approved by senior management;
• It must provide details of how the firm mitigates and manages risks of money laundering and terrorist financing which have been identified in risk assessments.
• The pic will include firm’s risk management practices, how client due diligence is conducted, the firm’s reporting and record keeping systems as well as info on how it intends to deal with complex/unusually large/ unusual patterns of transactions.
• This is required by regulation 19.

Question 11

What are the MLRO and MLCO within a firm?

Answer 11

• The Money Laundering reporting Officer and the Money Laundering compliance Officer.
• These are often the same person.

Question 12

What is the role of an MLRO?

Answer 12

• Receives reports from people in the firm re concerns of money laundering/ suspicious transactions.
• Has the role of reporting these to national crime agency if necessary and also leasing with the SRA.

Question 13

What is the role of the MLCO?

Answer 13

• Nominated officer for money laundering compliance and is in regular contact with the SRA re such issues.
• They are the SRA’s main point of contact for issues/ changes relating to money laundering guidance etc.

Question 13

Aside from appointment of the MLCO and MLRO, what further two internal controls are firms required to put in place?

Answer 13

1) Screening of relevant employees prior to and during course of employment (assessing skills, knowledge, conduct and integrity). This relates to all employees involved wither with compliance, or have roles in identifying, preventing and detecting money laundering and terrorist financing (eg those who verify client identities etc).

2) Establishing indépendant audit function to examine, evaluate, make recommendations and monitor firm’s policies controls and procedures to comply with regulations.

Question 14

List the circumstances where a client’s identity will need to be verified by the firm.

Answer 14

1) client and solicitor agree a business relationship;
2) carrying on occasional transaction (ie not carried on through an existing business relationship meaning they are not already a current client) amoutining to a transfer of funds (basically meaning transaction partially carried out by electronic means) exceeding £1000;
3) carrying on occasional transaction which amounts to £15,000 or more (wither if executed in a single transaction or as par of a series of transactions which appear to be linked);
4) where solicitor suspects money laundering or terrorist financing; or
5) where solicitor doubts veracity or adequacy of docs or info supplied to verify the client’s identity.

Question 15

Explain the client verification process.

Answer 15

Verification is required as soon as possible after first contact and must be carried out prior to business relationship being established/ prior to the transaction.

Question 15

Explain the circumstances where a solicitor may verify the client’s identity during the establishment of a business relationship (ie instead of prior to the transaction/ agreeing to act).

Answer 15

where:
1) there is little risk of money laundering/ terrorist financing; and
2) it is necessary not to interrupt normal conduct of business; and
3) identity is verified as soon as practicable after contact is first established.

Question 16

Where it is not necessary to complete the client verification prior to commencing work/ agreeing to act, when out the client due diligence be completed by (and if not completed what steps should the solicitor take)?

Answer 16

If solicitor is unable to complete the client due diligence in time, the solicitor cannot:

1) carry out the transaction with or for the client through a bank account; or
2) establish a business relationship or carry out a transaction otherwise than through a bank account.

In such circumstances (where client DD is not conducted) solicitor must terminate existing business relationship and consider making disclosure to NCA.

Question 16

Which documents are usually sufficient for confirming an individual client’s identity?

Answer 16

It is considered god practice to have either:
1) gov doc verifying person’s name and address/ DOB; or
2) gov doc verifying person’s full name, alongside other doc which verifies their name and either address or DOB.

Passports and driving licences are usually sufficient.

Question 17

What three things need to be provided when verifying the identity of private limited company/ LLP?

Answer 17

1) Name of company;
2) CRN; and
3) Registered office address.

Also important to obtain names of main directors/ copies of incorporation documents iid accessible (which should be on companies house).

Question 18

Aside from the company information, what else needs to be provided as part of the client due diligence process?

Answer 18

• The identity of the beneficial owner of the company (ie the Ian shareholders). this is to ensure the person giving instructions on behalf of the company has the authority to act.
• This may be someone who has direct control (eg a direct shareholder or someone who has indirect control (owns shares in a company which owns the company giving the instructions to act).

Question 19

How is the beneficial owner of a company defined for the purposes of the anti money laundering regulations?

Answer 19

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

Note this regulation also applies to LLPs and is contained at reg 5(1)

Question 20

How is the beneficial ownership of a partnership defined under the regulations?

Answer 20

Any individual who:

(a) Ultimately is entitled to or controls (whether the entitlement or control is direct or indirect) more than a 25% share of the capital or profits of the partnership, or more than 25% of the voting rights in the partnership; or

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

Question 21

How is beneficial ownership of a trust defined under the regulations?

Answer 21

It means each of the following:
1) the settlor;
2) the trustees;
3) the beneficiaries.

Question 22

Explain when simplified due diligence is permitted.

Answer 22

• When firm determines through individual risk assessment that business relationship or transaction presents low risk of money laundering/ terrorist financing.
• The following factors will be taken into account:

1) whether client is a company lustre on a regulated market; and
2) the location of the regulated market; and
3) where a client is established and does business.

• Note that the presence of one or more of these factors does not always indicate there is a lower risk.
• Solicitor must obtain evidence the transaction and client are eligible for simplified due diligence. The nature of this evidence depends on identity o the client (eg for a PLC solicitor will need to obtain confirmation of company’s listing on the stock exchange).

Question 23

Explain when enhanced due diligence will be required.

Answer 23

If something about the transaction creates a high risk of money laundering.

Reg 33 lists the following circumstances where enhanced due diligence is needed.

In such situations, solicitor must take measures to examine background and purpose of transaction (and consider whether it is appropriate to obtain further independent verification of client’s/ beneficial owner’s identity).

Question 24

List the situations where enhanced due diligence is required, as set out in reg 33.

Answer 24

1) Case is identified as high risk of ML/ TF in firm’s risk assessment or info from SRA/ Law Society;
2) Client or other party to transaction is in high risk country (as defined in regs);
3) Client provided false/ stolen identification info/ docs and solicitor declined to continue dealing with the client;
4) Client is a potentially exposed person (PEP), or family member or known close associate of a PEP;
5) Transaction is complex or unusually large, or there is an unusual pattern of transactions/ transaction appear to have no legal/ economic purpose.
6) Any other situations which may mean/ indicate higher risk (such as an unusual business relationship, unseal payments from third parties being involved in the transaction etc).

Question 25

Explain the money laundering training requirement imposed on law firms.

Answer 25

• Regulation 24 imposes obligation on firms to provide (and maintain a record of) training to their employees in respect of money laundering.
• Employees are to be made aware of the law relating to money laundering, terrorist financing and requirements of data protection which relate to them.
• Regs also specify employees need to be given training on how to recognise and flag transactions which appear to be at risk of ML/TF.

Question 26

How long should records of the info/docs and due diligence obtained to verify a client’s identity be kept for following the end of the business relationship/ transaction?

Answer 26

Minimum of 5 years.