Money laundering

ARTICLE

Money laundering

It was Phaedrus who commented in the first century that ‘things are not always what they seem.’ This is the essential paradox that underlies current Money Laundering regulation.

Detailed regulation demands that solicitors take steps in their risk assessments to satisfy themselves that they may proceed or cease to handle matters, and whether they must report a case to the National Crime Agency (NCA). The uncomfortable reality that lies behind even the most scrupulous of risk assessments is that the truth may remain hidden from view to the solicitor.

In January this year the Legal Sector Affinity Group (LSAG) published its Anti-Money Laundering Guidance for the Legal Sector 2021 written because of the changes made to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 by The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 that came into force on 10 January 2020 (MLRs).

There are organisational requirements in relation to governance and policies for firm wide risk assessment, matter assessments, for record keeping, monitoring, and training that are formidable. Firms must establish and maintain written policies, controls, and procedures (PCPs) for identifying, managing, and mitigating the risks identified in the mandatory Practice Wide risk assessment completed as required by R18 of MLRs.

A core principle of AML compliance is taking a risk-based approach and adjusting the level and type of compliance work to the risks present. That requires firms to have information on the risks inherent to their practice and in any particular client or matter. If the risks present across a business or in any particular client or matter are not assessed, it will be clear that the appropriate controls and procedures to mitigate those risks are not being deployed. The PCPs must be proportionate to the size and nature of the business and must be approved by senior management and reviewed regularly with a record kept of all changes made to these records over time.

The guidance goes on to say that ‘Just because a practice is smaller and serves a smaller quantity of clients at any given time, does not necessarily mean that it is lower risk. Smaller practices may be targeted more than large law practices by money launderers, as they may be perceived as lacking resources to effectively guard against them. Equally, smaller practices may practice higher risk types of work, develop a niche in services or have cultural, social or language connections or other features which may be attractive to money launderers.’

It also goes on to say ‘that risk is a judgement relying on considering multiple factors holistically. Generally speaking, a single factor may not automatically make a matter or client high risk in and of itself, exceptions include where a client or counterparty is based in a high risk third country or is a Politically Exposed Person (PEP). It should be all the risk factors taken together that informs whether a matter or client is deemed to be high risk.’

These complexities leave many solicitors worried at the level of compliance required by the Solicitors Regulation Authority (SRA) but unable to be certain whether or not the assessments carried out within a firm are sufficient to identify what may lie hidden beneath the routine transactions carried on by known or typical clients of the firm.

Taking typical routine residential conveyancing matters it is not hard to classify certain work as either out of scope or high risk where it involves overseas clients, overseas funding, complex land assembly or development work where the firm is being introduced by a party with an interest in the transaction or introduced to act for buyers where the introducer has an interest in the transaction as developer investor or seller. There are cases reported where firms might have avoided difficulties had their business model been restricted to exclude certain types of instruction or client rather than subject them to costly scrutiny. There are many situations where firms do indeed take that action and this is of itself not helpful to the regulator’s objective of meeting ‘unmet legal need’.

When it comes to client due diligence many tests involve risk assessment which may be largely subjective and thus subject to opinion or bias. Every case must be subjected to specific assessment, the higher the perceived possible risk then the greater the degree of investigation that is necessary.

Evidence at one time used to be gathered face-to-face and simply scrutinised for obvious omissions signalling possible fraud or forgery. Nowadays with the use of online searches a wide variety of information is available that enables information to be triangulated for any incongruity to be identified.

The more facts that are gathered the safer any assessment may appear to be though such is the rich variety of real-life situations that clients experience in relation to employment, inheritance, sickness, insurance claims, or even lottery wins that much time can be expended going down cul de sacs. There are no hard and fast rules and yet the bar for suspicion is not high which means that objectivity effectively rules in risk assessment and even where a matter is assessed as low risk that does not provide immunity from investigation. In larger firms this complexity has spawned an industry of compliance officers.

The upshot publicly is that solicitors are criticised for raising too many or too few Suspicious Activity Reports but are in the dark as to whether their reports are looked at, are useful or form the basis for investigation and action. Inevitably motivation to carry out the necessary compliance is driven by fear and tends towards a tick box approach and defensive measures that are likely to satisfy scrutiny by the regulator rather than be effective in crime prevention or enforcement.

In July the H M Treasury (HMT) raised a Call for Evidence as to the improvements that might be made to the current regulations, and these are teased out through over 60 detailed questions.

The Call for Evidence was published in line with the UK's Economic Crime Plan 2019-22, which committed HMT to undertake a review of the MLRs and it looked at three themes:

■ the overall effectiveness of the regimes and their extent (i.e. the industry sectors in scope of the regime);

■ the application of elements of the MLRs to ensure they are operating as intended; and

■ the structure of the supervisory regime, and the work of the Office for Professional Body Anti-Money Laundering Supervision ("OPBAS"), to improve the effectiveness and consistency of Professional Body Supervisor ("PBS") supervision.

This might be regarded as a wasted opportunity to review holistically whether the system and apparatus that has been developed over many years is fit for purpose.

Also in the summer the Wolfsberg Group –an association of thirteen global banks with aims to develop frameworks and guidance for the management of financial crime risks – issued a report – Demonstrating Effectiveness. This was the latest in a series of guidance and other materials to provide the industry perspective on effective financial crime risk management.

It suggested that: ‘most financial Institutions (FI’s) do not focus their anti money laundering and counter terrorism finance (AML/ CTF) risk assessments on government priorities. Instead, and largely in response to supervisory expectations, AML/CTF risk assessments are focused on technical compliance with requirements rather than the effectiveness of the FI’s efforts to prevent and detect financial crime. This exercise typically culminates in an enterprise-wide risk assessment which tends to be very long, complex, and focused on data, documentation, and process rather than outcomes.’

This begs the question as to how effective and efficient the apparatus of AML /CTF regulation really is?

There is no doubt that the issue is serious. The National Crime Agency (NCA) assessment for the UK published in spring this year said: ‘Money laundering is a key enabler of serious and organised crime, which costs the UK at least £37 billion every year. The NCA assesses that is highly likely that over £12 billion of criminal cash is generated annually in the UK and a realistic possibility that the scale of money laundering impacting on the UK (including though UK corporate structures or financial institutions) is in the hundreds of billions of pounds annually.’

However, for many high street firms it might be argued that without a further breakdown of the nature and types of crime and criminal involved, proportionality should be a relevant consideration. A small transaction limit would represent a rational and reasonable approach enabling scarce resource to be targeted into priority areas.

In its 2019 report the Law Commission came down against this view in its recommendations saying:

‘we considered whether there was merit in reducing the scope to eliminate those with little intelligence value by:

(1) limiting the scope of reporting all crimes to just serious crimes as defined; and

(2) extending the circumstances in which a reporter may have a reasonable excuse not to make a disclosure.

Ultimately, we concluded that it would be desirable to maintain the status quo for the reporting of all crimes. This is principally because the intelligence value of suspected criminal property will not necessarily correspond with how serious the crime is, or how valuable the intelligence is. This is particularly true of suspected terrorism financing SARs. A threshold of seriousness may also create additional burdens for reporters who would be required to identify the underlying offence’.

So the public interest was considered to rest in continuing the status quo – a rationale that seems unconvincing and rings somewhat hollow without hard evidence that the measures currently in place are effective and efficient and are producing significant successful results.

There is an incongruity between the matters that require rule based compliance and those where risk is for personal assessment. But given the fear of failing the standards set by regulators and the sanctions that may follow the outcomes can be perverse as many firms may tend to exclude subjective risk assessments and adopt risk averse benchmarks that tend to narrow the services that are offered and the profile of client and matter that will be accepted.

Even greater scope for complexity and misunderstanding arises from the provisions of the Proceeds of Crime Act 2002 (POCA) itself. Money laundering is defined by the offences described in ss327-329 POCA and S330 requires persons in the regulated sector to report “money laundering” where they know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering. Under POCA s330(6) there is a possible defence to the failure to make a disclosure as no offence arises under s 330 if there is a reasonable excuse for failing to make a disclosure in three situations:

■ you have a reasonable excuse.

■ you are a professional legal adviser, or a relevant professional adviser and the information came to you in privileged circumstances; or

■ you did not receive appropriate training from your employer.

On 2 June 2021, the Crown Prosecution Service (CPS) updated its guidance on prosecuting failure to report cases under s330 Proceeds of Crime Act 2002 (POCA).

Prior to the update, the CPS did not charge failure to report offences under s330 POCA where there was insufficient evidence to establish that money laundering was in fact planned or undertaken.

The updated guidance states that the CPS considers that it is possible to charge a person under s330 POCA even where there is insufficient evidence to establish that money laundering was planned or has taken place.

This indicates a focus on “professional enablers” of money laundering and removes a barrier to prosecution with the consequence, that the update guidance may encourage more “defensive” SARs to be filed. In the absence of judicial guidance as to what will constitute a reasonable excuse it is it is important to record the decision-making process to be in a position to answer an allegation of failure to make a disclosure under s330. It does not seem appropriate that a criminal sanction should attach to the level of breach in question.

The SRA is committing greater resources to its monitoring and investigation. In its October report to OPBAS the SRA reports that it has submitted an increased number of SARs as it had identified a suspicion of money laundering through its work. The number has gone from 11 in 2017/8 to 39 in 2020/2021.

This is stated to reflect:

■ the presence of a dedicated money laundering reporting officer (MLRO) and AML team

■ increased staff training on when to submit an internal SAR to the MLRO for review

■ more proactive supervision of firms carrying out work that falls under the regulations.

The SARs submitted were in relation to the following:

■ property conveyancing

■ fraud

■ tax evasion

■ bogus investment schemes

■ clients / funds from high-risk jurisdictions

■ high-risk commodities (precious and scrap metals)

■ aborted property transactions

■ no underlying legal service or purpose for transaction

■ complex offshore company structures/trusts.

Attention is drawn to SRA Warning Notices at: https://www.sra.org.uk/solicitors/resources/moneylaundering/how-we-regulate/

Given the perspectives and comments set out above, it will come as no surprise to readers to know that the author's personal response to the Call for Evidence suggested that:

■ the questions that need to be asked should be redirected to address how effective the current system is at preventing the growth of money laundering and terrorism financing

■ there should be a full assessment of the impact upon enforcement of crime; upon the productivity of the regulated sector; and of the cost to the regulated sector and the public taking account of State and other resources invested.

The conclusion might well then be for changes to make the regulation of money laundering effective and relevant to all of those businesses within the regulatory net and their customers and clients who must bear the cost. ■

Michael Garson

The views expressed are personal to the author.

Sources:

1. https://www.gov.uk/government/consultations/call-forevidence-review-of-the-uks-amlctf-regulatory-andsupervisory-regime

2. https://www.lawsociety.org.uk/campaigns/consultationresponses/call-for-evidence-uk-aml-regulatory-andsupervisory-regime

3. https://www.lawsociety.org.uk/topics/anti-money-laundering/ anti-money-laundering-guidance

4. https://www.cps.gov.uk/legal-guidance/money-launderingoffences

5. https://nationalcrimeagency.gov.uk/news/online-is-the-newfrontline-in-fight-against-organised-crime-says-nationalcrime-agency-on-publication-of-annual-threat-assessment

6. https://www.wolfsberg-principles.com/articles/publicationwolfsberg-group-statement-demonstrating-effectiveness

7. https://www.sra.org.uk/sra/how-we-work/reports/antimoneylaundering/