Client due diligence by SPONSOR Aon

Client due diligence by SPONSOR Aon

The way that a firm handles new matters is absolutely key to the long-term success and viability of the firm. Client Due Diligence (CDD) is one important aspect of handling new instructions. If you don’t meet all your compliance obligations, it is likely that there will be shortcomings in other areas of your service. Poor practices will be replicated across the firm. If corners are cut, claims and complaints may result. Sometimes corners are cut with the intention of filling in the gaps later but that rarely happens. If such practices are picked up by the Solicitors Regulation Authority (SRA), then there may also be regulatory consequences.

 

By contrast, where matters have been started on the right foot, it’s much less likely that things will go off the rails later. In most cases, well-managed files do not give rise to negligence claims.

 

Effective CDD helps firms to identify and avoid suspicious transactions, making it a very potent weapon in the fight against money laundering. When determining the potential for criminal activity, a risk-based approach is required.

There’s a lot of attention at the moment, from the Government down, on professional enablers, of which there are four main types: the first two types are those actively complicit or negligently involved in the transfer of money through client accounts. Then there are those who cut corners, perhaps running matters on miscellaneous files to avoid file opening requirements and those who are unwittingly involved.

 

The SRA published its thematic review of money laundering in May 2016. Many of the 252 firms involved reviewed their processes as a result of the visit. After all, there’s nothing like a knock on the door from the regulator to make you dust off your procedures manual. Of course, the vast majority of firms haven’t received such a wake up call. 640 money laundering incidents involving firms have been reported to the SRA over the last four years, so lawyers should not be complacent about the risks.

 

The SRA noted that not all firms had good controls in place and that some smaller firms may be less conscientious about ensuring adequate recording of the CDD steps that have been undertaken or checking that procedures are followed.

The regulated activities to which the Money Laundering Regulations apply include the buying and selling of real property or business entities, the managing of client money, securities or assets and the opening or management of bank accounts and trusts. One particular area to watch out for is the use of your client account as a bank account where there is no underlying legal transaction. Over the last four years, the SRA is aware of 65 such incidents, with a recent example in July 2016 involving a COFA whose firm made 54 transfers totalling almost £6m for one client.

 

It is good practice to apply the requirements firm-wide as there are clear benefits for firms in knowing their clients and understanding their instructions better. Understanding a transaction, its economics and purpose can be a simple but effective way to establish whether an unduly complex transaction is suspect, as those involved will quickly become evasive if you probe.

 

Solicitors, as a profession, are very trusting of what their clients tell them. Information is often taken at face value with many fee earners shying away from asking probing questions for fear of upsetting the client. Failure to ask appropriate questions may store up problems for the future. Awareness, vigilance, and caution are the best weapons in a solicitor’s armoury when it comes to CDD.

 

Before establishing a business relationship, firms need to obtain information as to the purpose and intended nature of the relationship. The CDD itself is a two-stage process: identification and verification.

 

Identification involves obtaining and recording information given by the clients concerning their identity, such as their name and address. Other details may include past addresses, their dates and places of birth, and employment or financial history.

 

As an adjunct to CDD, if the matter involves dealing with client money, the firm needs to have well-developed anti-fraud procedures covering the identification and communication of its own and its clients’ banking details.

 

The identification must be verified by independent and reliable evidence, which can include data or information obtained from a reliable and independent source. Original documentation must be obtained and reviewed. Procedures which are superficial or mechanistic, particularly if undertaken by administrative staff unaware of their importance, may not be sufficiently robust. Firms need to be vigilant. Just having procedures in place is not enough. Firms should also check that procedures are being followed assiduously.

 

The recent case of Purrunsing v (1) A’Court & Co, (2) House Owners Conveyancers Ltd (2016) EWHC 789 (Ch) provides a salutary lesson as A’Court & Co were held to have failed to carry out risk-based CDD on their client, resulting in them sharing liability with the other firm for Purrunsing’s significant losses.

 

Firms do not need to be experts in spotting forgeries but they should be able to spot obvious anomalies. There may be some tell-tale signs for example. You may be shown a passport with a photograph that obviously doesn’t meet the Passport Office requirements on distance, hats, hair or the wearing of glasses. Accordingly, when training your staff on CDD, mention the requirements which can be found on thewww.gov.uk website if you enter passport photos into your search engine.

 

Because of the sophistication of some forged documents these days, many firms now carry out electronic checks as well, although firms that only complete electronic checks risk breaching the Council of Mortgage Lenders Handbook requirements in relation to property transactions.

 

A combination of electronic and paper verification can give firms more confidence that their ID verification processes are reliable. Electronic evidence providers can access current and previous circumstances from a range of sources, negative as well as positive information and a wide range of data alerts.

 

Many firms invoice their clients for the cost of electronic searches, but showing the cost as a disbursement is clearly wrong. Even treating it as a re-charged item risks conflict with the SRA, whose view is that such costs should generally be borne by the firm as part of its overheads.

 

The results of electronic checks are often kept by the fee earner, with no sharing of information with the firm’s Money Laundering Reporting Officer (MLRO) or Compliance Officer for Legal Practice, its COLP. Matters flagged up in a report are sometimes ignored by fee earners, or explained away as insignificant. If there is a pooling of information, the COLP or MLRO will be better able to judge whether the correct approach has been adopted. Results can also be incorporated into the firm’s training on CDD.

 

In terms of timing, you are required to verify a client’s identity (or that of a beneficial owner) prior to establishing a business relationship or carrying out a transaction. It is not uncommon, particularly in conveyancing, for firms to delay CDD until the pre-exchange meeting (which is often the first time that the fee earner meets the client). That can be two months or more into the transaction. If you have not completed the process, you should not be accepting funds on account from the client.

 

Firms should track when CDD has been completed. Where there is delay, the COLP or MLRO should consider whether there is good reason for delay by the client. If this amounts to suspicious activity, a report to the National Crime Agency may be necessary.

 

CDD is sometimes seen as an administrative hurdle that gets in the way of delivering a legal service. Don’t let its importance be overlooked. Make sure your systems are in place and that you can demonstrate they’re effective.

 

For more information on this article, please contact: 

Marco D’Ovidio, Associate Director, Aon UK Limited

On 0117 9485116

 

Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.

This article has been compiled using information available to us up to 6 February 2017.

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