Client money: risk-based approaches
On the alert for laundered money
23 August 2019
The key to avoiding the threat of money laundering in a property transaction is to adopt a risk-based approach, advises Nadia Kohli
Q: I’m in a new job and under pressure to complete a property deal quickly, but I want to take the time to do the proper checks for money laundering. How do I convince my colleagues of the need to do this?
A: Lawyers and law firms are constantly being pressured to win new work, meet targets and obtain repeat instructions. With ever-increasing competition, real-estate lawyers may be unable to turn work away.
The nature of modern property transactions, coupled with developing economies and enhanced technology that enables communication anywhere in the world, means there is no excuse for delays.
At the same time, the Solicitors Regulation Authority (SRA) has been cracking down on breaches of anti-money laundering regulations, so it’s important for professionals to know what they should be doing, and what issues will require an enhanced due diligence (EDD) review. Law firms and other regulated sectors are extremely susceptible to so-called high-end money laundering.
On 15 May 2018 in the High Court, law firm Mishcon de Reya was held liable for breach of trust as the buyer’s solicitors, even though it was the seller’s solicitors that had failed to carry out their obligations under the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
Since 2015, the SRA has referred 49 lawyers to a disciplinary tribunal, resulting in 12 being struck off, the suspension of 13, and more than £800,000 in fines for cases linked to potentially improper movement of money.
The Law Society of England and Wales says signs of money laundering can include:
- clients with no obvious reason to instruct you, or a transaction with no obvious commercial purpose;
- secretive clients who may be reluctant or evasive, or who refuse to share information;
- clients who provide all required information without being prompted, perhaps attempting to rush the process; or
- a client using 3rd-party funding or last-minute changes to funding arrangements, leaving insufficient time to do proper due diligence on the 3rd party.
In the past 18 months, the SRA has also prosecuted 20 solicitors and 3 firms for breaching SRA Accounts Rule 14.5 of 2011, which prohibits the use of a firm’s accounts as a banking facility for clients; 3 solicitors were struck off and 2 more suspended, while £763,000 in fines was levied, including a record fine of £500,000.
Some lawyers may never meet or even speak to their clients, though, so how can meaningful due diligence be undertaken? The key is to adopt a risk-based approach rather than simply obtaining confirmation of identity and bills to tick a box. So, if a client tells you their money represents the proceeds from a business, but this isn’t immediately obvious, you would want some information on the business. The same goes for savings.
Lawyers are not forensic accountants, but they should nonetheless undertake a reasonable analysis of a client’s identity and finances, unless there are any red flags that would immediately require EDD. Reasonable grounds for EDD include:
- property transfers made at very high or low prices;
- a direct transfer of deposits, perhaps exceeding 10 per cent of sale price by a buyer to the seller;
- the use of offshore structures; and
- transactions coming through and from parties in high-risk countries.
The maximum penalty for a principal money laundering offence is 14 years’ imprisonment, an unlimited fine, or both. Similarly, failing to disclose or report money laundering can result in unlimited fines and up to 5 years’ imprisonment.
In 2006 a solicitor was sentenced to 3 months’ imprisonment as he was found to have allowed £66,000 to pass through his client account during conveyancing work for a convicted criminal. Conveyancers must be wary of committing an offence through involvement in their clients’ activities.
Nadia Kohli is a senior associate at Streathers Solicitors LLP
- RICS offers online training in Countering bribery and corruption, money laundering and terrorist financing
- This feature is taken from the RICS Property Journal (July/August 2019)
- Related categories: Ethics and professional conduct