AML - 25 years and counting by Sponsor Aon

When so much of the work they handle involves financial or property transactions, law firms find themselves, often reluctantly, in the front line of the fight against money laundering.  Along with banks and financial institutions, they act as the government’s gatekeepers.  It is 25 years since the first Money Laundering Regulations were passed, although legal services were not caught until ten years later. In this time, the criminal landscape has changed almost beyond recognition, but it is less clear whether the steps taken by law firms have kept pace.

 

The first EU AML directive from June 1991 resulted, inter alia, in the Money Laundering Regulations 1993.  While there has been growing concern about the role of law firms as professional enablers, file reviews suggest that many firms continue to pay lip service to certain aspects of the requirements.

 

Consider the number of money laundering reporting officers who admit to not having attended any training on the current regulations, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, let alone the Criminal Finances Act 2017 or the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017.

 

This attitude feeds through into a firm’s policies and procedures.  It is all too common to see procedures (and Terms of Business) that still refer to the 2007, or even the 2003, AML regulations.  Changing the date from 2007 to 2017 without any substantive review of content is as unconvincing as printing the 2017 regulations or the Legal Sector Affinity Group’s March 2018 AML guidance without anything to show that they have been read or applied.  This is particularly so if the firm’s AML folder also includes information and staff training records that are way out of date.

 

Most firms are aware of the need to identify their clients and to verify that identity. But when reviewing files, it is very common to see copy ID documents on file, uncertified, without any indication of how they were obtained.  If you ask the fee earner whether the copy was taken by the firm or supplied by the client, they will tell you that it is their usual practice to take a copy of the original.  Pressed to say what happened on this file, they will admit they don’t know.  Without certifying the copy as bearing a true likeness (and dating it to show that checks were completed at the outset) or keeping an attendance note or other record, it is extremely unlikely that anyone will remember in time to come whether originals were inspected.

 

Shortcomings in due diligence may be due to inadequate training, poor supervision or the delegation of what are seen as routine tasks to junior or temporary staff. They may also stem from too much empathy with the client, rendering fee earners unwilling to consider that their clients would pose any risk.

 

Of course, appropriate procedures must be in place to ensure that the right documents are reviewed.  In 2018 some firms are still ready to accept paper counterpart driving licences even though they have had no legal status since 8 June 2015.  And in the property fraud case, Dreamvar, the seller’s solicitors accepted a TV licence despite this never having been recognised as a suitable document for verifying identity.

 

In another property fraud case, P&P Property Limited, the seller’s solicitor accepted a driving licence that had recently been issued for three years.  Normally of course a driving licence is valid until the holder reaches 70, although photocards have to be renewed every ten years, so a limited duration licence is very unusual.  Short term licences are usually issued where health reasons may impair the holder’s ability to drive.  A solicitor should not be afraid of asking probing questions to meet AML requirements.

 

Increasingly, firms act for clients who they never meet.  If the client sends a passport or driving licence by post, the firm will have seen the document but not the client so will have no idea whether a photo bears a true likeness to the client.  To address this issue, there has been a trend in the recent years for firms to ask clients to produce a ‘selfie’ photo as proof of their ID with their passport held open beside their head.  The HMRC issued guidance in June 2017 pointing out that firms using this technique do not meet the requirements of the 2017 AML regulations.

 

An alternative is to ask clients to have their ID certified by an appropriate third party such as a bank official or solicitor local to them.  On file reviews, it is rare to see evidence of any steps taken to verify the identity of the certifier.  If the certifier is a professional person, some firms will check that the person exists by reference to Find A Solicitor (or as the case may be) - as can the fraudster!  Such checks are of limited value unless contact is made with the person to verify that the documents were certified as claimed.  In P&P Property Limited, above, no attempts were made to verify the bona fides of the person certifying the documents as genuine.

 

Many firms now submit online identity checks.  They can sometimes be appropriate on their own but are best used in conjunction with checks of paper documents as a ‘pass’ only confirms that the person exists, not that they are the person instructing you.  Online checks are also helpful in checking for potential PEPs and Sanctions issues.  Appropriate procedures are required where the result is a referral or a fail.  In P&P Property Limited, above, when the result was referred because it was not possible to identify the seller at the given address nor to verify his date of birth, which should have rung very loud alarm bells, no further enquiries were made.

 

While important, ID verification is not the be all and end all of AML compliance.  After all, even fraudsters have to live somewhere!  Of equal importance is your risk assessment of the client and of the matter.  You need to know your client so that you can assess the purpose and intended nature of the relationship or transaction.  In its March 2018 Money laundering review, the Solicitors Regulation Authority (SRA) concluded that only 69% of files reviewed showed evidence of such risk assessments.  Although that suggests that 31% of matters have not been subjected to any form of risk assessment, the likely reality is that many more firms do not conduct appropriate assessments as a matter of course.

 

When funds pass through your client account, part of your risk assessment will include verifying where the money will come from and, when paid, that it is sent from there.  This is another area which receives little more than lip service.  A client telling you that it is coming from a particular account does not amount to evidence.  Only marginally better is the client who provides a copy bank statement showing a balance in excess of £600,000 but on which the name address and account number has been redacted.  This is more useless than the proverbial chocolate teapot (which might at least look or taste good).

 

The Court of Appeal in P&P Property emphasised that the AML regulations impose statutory obligations for the benefit of society at large, rather than particular individuals.  It is too early to say whether this will prevent future allegations of negligence against firms who fail to comply.  But, as a matter of good practice, and to avoid possible criminal sanctions, compliance is the best policy.

For more information on this article, please contact:

Ryan Senior, Head of Legal Sector Practice, Aon UK Limited

On 0117 9485014

  

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 01 May 2018.

Like   Back to Top   Seen 532 times   Liked 0 times
Subscribe to Updates And Join Over 1.2K Subscribers Today!

Subscribe to:
x

Subscribe to Updates

If you enjoyed this, why not subscribe to free email updates and join over 1275 subscribers today!

Subscribe to updates



Subscribe to:

Alternatively, you can subscribe via RSS RSS

‹ Return to

All email subscriptions must be confirmed to comply with GDPR.

I've already subscribed / don't show me this again