Money Laundering Flashcards
(29 cards)
What is money laundering and how does it affect solicitors?
Money laundering is the process whereby criminals launder proceeds of crime to make them seem as though they come from a legitimate source
Investing money + when the investments are sold, the proceeds seem to have come from a legitimate transaction
Solicitors constantly deal with transactions and handle client money, so they are targets for money laundering criminals – features in the SRA Risk Outlook as a key risk for the profession
What are the 3 distinct stages of money laundering?
1) Placement - money from criminal activity is introduced into the financial system
2) Layering - the money is distanced from the criminal activity by passing it through several parties or transactions
3) Integration - the money is integrated back into the financial system and the criminal is now in possession of ‘laundered’ money
What areas of solicitors’ practice might be especially suspectible to money laundering?
Company and trust work – companies and trusts can be complex legal entities, meaning money can be hidden behind layers of ownership
Use of a client account – passing money through a firm’s client account ‘swaps’ illicit money for clean money
Real estate – money must pass through the firm’s client account to enable the transaction to proceed + the criminal comes into possession of an asset, which can be sold for legitimate proceeds
Sham litigation – where litigation is pursued for a settlement or judgment that makes things look legitimate (i.e. one side doesn’t defend a claim and default judgment is entered)
What are the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 and give an overview of how they apply.
They are intended to inhibit criminals’ ability to reinvest or benefit from the proceeds of crime
They apply to people acting in the course of business carried out in the UK, which includes independent legal professionals
- Firms + sole practitioners included, when participating in financial or real property transactions
Failure to comply with Regulations is a criminal offence
There is a requirement for the ‘beneficial owners, officers or managers’ of the firm and sole practitioners to apply to the SRA for approval under the Regulations.
- Approval must be granted unless the applicant has been convicted of a ‘relevant offence’
What are a law firm’s requirements in relation to risk assessments for money laundering?
Firm must take appropriate steps to identify and assess the risk of the firm being used for money laundering
- Firm will consider services offered, how they’re delivered, nature of firm’s clients and industries in which clients operate - individual assessment for each firm, not one size fits all
Fundamental requirement + starting point for all AML activities within a firm
- SRA will take enforcement action against firms with no risk assessment or one that is inadequate
In general, what is a law firm expected to do in relation to policies, controls and procedures about AML?
A firm is required to establish and maintain written anti-money laundering policies,
controls and procedures (proportionate to its size and nature and approved by its senior management) to mitigate and manage effectively the money laundering and terrorist financing risks identified in its risk assessment
Who two roles must a firm appoint in relation to AML?
Firm must appoint a Money Laundering Reporting Officer (MLRO) to receive reports from within the firm concerning any instances of suspected money laundering + to liase with National Crime Agency
Firm must also appoint a Money Laundering Compliance Officer (MLCO) if this is appropriate with regards to the size and nature of the firm
- Often, they act as the SRA’s main point on contact on AML issues
- One person can carry out both roles
Although the same person can perform the roles of MLRO and MLCO at the same time, what is the proviso to this?
The ML Regulations state that the post of MLCO must be occupied by a senior member of the firm, whereby their position would be equivalent to a director on the board of directors
A newly qualified solicitor may accept the post of MLRO, provided they possess experience and understanding of financial crime
What other relevant internal controls should a law firm have in relation to AML?
1) Firm must also screen relevant employees prior to and during employment to assess their skills, knowledge, conduct and integrity
- Relevant employees are those who contribute towards prevention of AML
2) Firm must also establish an independent audit function to examine, evaluate, make recommendations and monitor the firm’s policies, controls and procedures adopted to comply with the Regulations
3) Firm must also establish and maintain controls which enable it to ‘respond fully and rapidly’ to enquiries from law enforcement as to whether it maintains, or has maintained during the past five years, a business relationship with any person and the nature of that relationship
What is the requirement for due diligence generally?
1) Firms carrying out relevant business must verify the client’s identity ASAP after first contact and this must take place before a business relationship is established or the transaction is carried out
2) Firms will need to verify client’s identity where:
- The firm agree to form a business relationship with client
- Firm carries out occasional transaction that amounts to a transfer of funds exceeding 1000 euros
- Firm carries out occasional transaction that amounts to 15000 euros or more in one operation or several linked operations
- Where solicitor suspects money laundering or terrorist financing
- Where solicitor doubts veracity of information supplied to verify the client’s identity
Is due diligence needed where a client is known personally to a solicitor?
Yes, it is still important in this scenario
Normally, a solicitor must obtain ID ASAP. When may a solicitor verify the identity of the client during the establishment of a business relationship?
If:
- (a) there is little risk of any money laundering or terrorist financing occurring;
- (b) it is necessary not to interrupt the normal conduct of business; and
- (c) the identity is verified as soon as practicable after contact is first established.
What must the solicitor not do if they are unable to complete the client due diligence in time?
The solicitor cannot:
- (a) carry out a transaction with or for the client through a bank account; or
- (b) establish a business relationship or carry out a transaction otherwise than through a bank account,
In such circumstances the solicitor must also terminate any existing business relationship and consider making a disclosure to the NCA
How does standard due diligence work in relation to clients who are individuals?
Generally, must obtain ID from a reliable, independent source and take reasonable measures to understand the ownership and control structure of trusts and companies
Good practice to have a government document that verifies name and address or name and DOB
- Best to get originals
- Bank statement in conjunction with a government document might be OK, but insufficient alone for a private individual
How does standard due diligence work in relation to non-limited liability partnerships and companies?
For non-limited liability partnerships, obtain information on constituent individuals who make up partnership, or if too difficult, name, registered address and nature of business
For companies, you need name, company number + registered address + principal place of business
What other information can be useful to check/search for when the client is an unlisted (private) company?
- Copy of its articles and memorandum of association
- Certificate of incorporation
- Copies of their audited accounts
- Identities of directors
Solicitors must also identify any ‘beneficial owners’ where these are not the client.
Who will be classed as a ‘beneficial owner’ of a company?
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
Also common to identify beneficial owners of parent companies
Who will be classed as a ‘beneficial owner’ of a general partnership?
a) Someone who 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, someone who 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)
Who will be classed as a ‘beneficial owner’ of a trust?
(a) the settlor;
(b) the trustees;
(c) the beneficiaries;
(d) where the individuals (or some of the individuals) benefiting from the trust have not been determined, the class of persons in whose main interest the trust is set up, or operates;
(e) any individual who has control over the trust, ie one who has power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law, for example, to add or remove a person as beneficiary, or to appoint or remove trustees.
When is simplified due diligence likely to be used?
Permitted where an individual risk assessment determines the business relationship or transaction has a low risk of ML or terrorist financing
Need evidence that the transaction and client are eligible for SDD
Factors to consider include whether the client is a company listed on a regulated market, where they are established and how they do business
Enhanced due diligence is used where there is a high risk of money laundering. What circumstances might exist for there to be a high risk of ML?
- Case identified as high risk by firm’s risk assessment or by SRA/Law Society information
- Client or counterparty is in a high-risk third country
- Client has provided false or stolen ID and solicitor has decided to continue dealing with the client
- Client is a politically exposed person, or family member or known close associate of a PEP
- Transaction is complex or unusually large; unusual pattern of transactions or they have no apparent economic or legal purpose
- Any other situation of higher risk of ML/TF
What does enhanced due diligence entail?
Solicitor must take measures as far as reasonably possible to examine the background and purpose of transaction and maybe obtain more ID or information on ownership/control structures/financial position of the client
Necessary to conduct enhanced monitoring of business relationship
Who is classed as a ‘politically exposed person (PEP)?’
1) Someone entrusted with prominent public functions, other than mid-ranking or junior officials
- Heads of State
- MPs
- Members of supreme courts + other high level judicial bodies whose decisions aren’t normally appealed further
- Members of boards of banks
- Ambassadors
- High ranking officers in armed forces
2) Family members = spouse, civil partners, children, children’s spouses and parents
3) Known close associates = close business relationship with them
4) Domestic PEPs (in UK) are subject to EDD, but are treated as lower risk than overseas PEPs
What additional steps must a solicitor take to act for a PEP?
Solicitor needs senior management approval, must take adequate measures to establish source of wealth + funds for transaction and conduct enhanced ongoing monitoring
