Anti Money Laundering (AML) | Teal Compliance

Anti Money Laundering for Law Firms

The legal sector is vulnerable to money laundering – and we’re here to help law firms with compliance and training, and make sure you’re fully equipped to ‘stop the baddies’.

The credibility of a law firm makes it an obvious target for money laundering criminals and having weak processes or staff that aren’t properly trained, is like leaving your front door open.

If you have any suspicions that money launderers have attempted to or have used your firm then your Money Laundering Reporting Officer (MLRO) needs to send a SAR to the National Crime Agency.  If you’re a MLRO and not sure whether or not you should report, or what to report, then let us know and we’ll help.

Money laundering and terrorist financing are obvious threats to our safety and to a well-functioning society and can support other criminal activity.  Legal professionals therefore have an important role in upholding the law and making sure they don’t unwittingly support criminal activity through financial transactions in their firm.

We have helped hundreds of legal sector professionals with advice and training on anti money laundering and we’re here to help you. For more information on our consultancy and training services call us or use our contact form.

The guide below provides more details on money laundering, the relevant Regulations and Directives, and what law firms need to know about managing and reducing risk.

 

Definition of Money Laundering

Money laundering is the process of changing and disguising the origins of money generated through criminal activity into appearing to be from legitimate sources. The Proceeds Of Crime Act (POCA) has a broader definition that includes passive possession of criminal property.

Money laundering typically consists of three distinct phases: Placement; layering; integration, and legal professionals could be targeted at any of these stages.  

  • Placement – This is moving cash into circulation through financial institutions and businesses and is the point at which criminal activity is most at risk of detection.

  • Layering – Once placed, the money is moved through complex transactions to obscure the origins and make it more difficult to detect laundering activity.

  • Integration – The layered money is integrated into the economy through investments such as property, company purchases, or trusts, making it appear legitimate.
     

There are a series of regulations and directives that have shaped the way the legal sector has to respond and adapt policy and process to prevent money laundering activity.

 

Money Laundering Legal Framework

Financial Action Task Force (FAFT)

The Financial Action Task Force on Money Laundering was established in 1989 by the G7 countries and built on related UN treaties of 1988 and 1990. There were 40 recommendations released in 1990 with a further nine released between 2001 and 2004 and an additional revision in 2012 – each set of changes were followed by a European Union directive 

 

First Money Laundering Directive

The first money laundering directive, issued by the European Commission to comply with the FAFT recommendations, was incorporated into UK law in 1991 as part of the Criminal Justice Act. Applicable to financial institutions it made money laundering a criminal offence.

Having identified a susceptibility of finance professionals to money laundering activities, the first directive established certain preventative measures including:

  • Customer/client identification

  • Record-keeping

  • Centralised systems of reporting suspicious transactions

     

Second Money Laundering Directive

The Second Money Laundering Directive amended and updated the First Directive on the prevention of the use of the financial system for the purpose of money laundering by refining the existing provisions and filling the gaps in the legislations. 

It included a broader definition of money laundering, incorporating underlying offences such as corruption and proposed to extend the provisions of the directive to the lawyers involved in financial or corporate transactions.

Following a backlash amid concerns over client confidentiality rules, the second directive was not extended to cover legal professionals.

 

Third Money Laundering Directive
 

The Third Directive did finally incorporate lawyers and other professionals such as accountants, real estate agents, and notaries within its scope. It followed on from the FATF’s revised anti-money laundering and counter terrorist financing standards of 2003.

In addition to the application of the directive to non-financial businesses and professions including lawyers, it also extended due diligence measures to require enhanced due diligence in certain circumstances with simplified customer due diligence procedures for low-risk transactions.

 

Fourth Money Laundering Directive
 

The Fourth Money Laundering Directive addressed changes in requirements following the revision of FATF recommendations in 2012. The key new developments in the Directive included:
 

  • Regulated entities are required to have written risk assessments

  • Changes to the application of simplified due diligence

  • Beneficial ownership provisions changes

  • Enhanced due diligence extended to domestic PEPs

Proceeds Of Crime Act 2002 (POCA)
 

While the Proceeds of Crime Act applies to everyone, the offences involving failing to report and tipping off are only applicable to those engaging in regulated sector activities.

POCA was amended in 2007 to adopt the Money Laundering Regulations 2007 definition of the regulated sector. These regulations were then replaced in June 2017 with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer Regulations 2017.

Schedule 9 of POCA references key business services or activities that could be relevant to independent legal professionals.  These include:

  • Tax advice by a practice or sole practitioner

  • Legal or notarial services concerning the buying and selling or property or business entities

  • Managing client money or other assets

  • Creating, operating, or managing trusts or companies

  • Opening or managing bank or savings/securities accounts

The Money Laundering Terrorist Financing and Transfer of Funds (information on the payer) Regulations 2017

The Money Laundering Terrorist Financing and Transfer of Funds Regulations attempt to restrict money laundering in the professional services sector by placing greater emphasis and obligation on better knowledge of clients.

They implement the 4th Directive, setting out requirements of the regulated sector in anti money laundering, providing a scope for CDD, and they replaced the Money Laundering Regulations 2007. 

The Regulations apply to independent legal professionals as described in Regulation 8.  This is defined as “a firm or sole practitioner who by way of business provides legal or notarial services to other persons” but doesn’t include those working in-house or under the employ of a public authority. 

These Regulations apply when certain activities are undertaken by a legal professional that have a risk of money laundering occurring such as:

  • The buying and selling of real property or business entities

  • The managing of client money, securities or other assets

  • The opening or management of bank, savings or securities accounts

  • The organisation of contributions necessary for the creation, operation or management of companies

  • The creation, operation or management of trusts, companies, foundations or similar structures
     

When determining if you are within the regulated sector and therefore fall under the scope of the Regulations, you should consider if you are providing services that could be defined as tax adviser, insolvency practitioner, or trust/company service provider.

If you’re not sure or need further guidance in this area, then get in touch with us directly for advice.

 

Risk Based Approach to Money Laundering

There is a high risk for independent legal professionals in being targeted and used for money laundering and terrorist financing and this can lead to a number of significant consequences including:

  • Criminal sanctions for the legal practice and/or individual employees

  • Civil action against individuals or the practice as a whole

  • Loss of business as a result of reputation damage
     

It is vital therefore that you fully understand the risks so they can be addressed and mitigated, to give you the best chance of preventing money laundering in your practice.
 

Taking a risk-based approach can help to minimise compliance costs and burdens on clients, give greater flexibility to deal with emerging risks, and provide a more efficient and proportional use of resources.
 

Your risk-based processes should be framed by consideration of the activities you undertake, any relevant rules and regulations you are subject to, and how susceptible your firm’s activities are to money laundering.
 

You are obliged under Regulation 18 (1) to undertake and maintain a full risk assessment – this is an area we can help with if you need advice or guidance on the best practice for risk assessments.

Anti Money Laundering Policies and Procedures
 

Law firms in the regulated sector are obliged under Regulation 19 to have written policies, controls, and procedures (PCPs), proportionate to the size and nature of the firm, to limit the anti money laundering any risks in the practice’s risk assessment.
 

PCPs must be available to all relevant staff in the business and should be regularly reviewed and updated with a written record of any changes made.  You must also keep a record of how you communicate PCPs, and any changes, to your staff.
 

You must have PCPs for:
 

  • Identifying complex or unusual transactions or unusual transaction patterns, or where there appears no apparent economic or legal purpose to the transaction.

  • Considering any additional measures that could prevent misuse of products or transactions where clients have a level of anonymity.

  • Considering any anti money laundering risks to the practice from adoption of new technology or legal services.
     

For help with creating relevant policies and procedures, give our team a call.

 

AML Training for Law Firms
 

Our training programmes are tailored to cover your specific policies and procedures and the regulatory requirements. They are practical and engaging to keep attendees interested and we continue to receive excellent feedback from law firms and their employees.

Some of the topics we cover include:
 

  • Compliance Officer Training Programme

  • AML Online Masterclass

  • MLRO Masterclass

  • COLP and COFA Masterclass

  • Data Protection Masterclass

  • Anti Money Laundering Update

  • Data Protection and Cybersecurity

  • Code of Conduct

  • Equality and Diversity

  • Complaints Handling

  • Anti Bribery and Corruption

  • Prevention of Tax Evasion

 

Follow our link for information regarding Working remotely with Teal Compliance.

 

To access our table of High Risk Jurisdiction please click here.

 

Find out more via our AML training section.

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