ADVANCED ANTI-MONEY LAUNDERING COURSE Course Notes Course Provider: Course: Riliance Training Limited Advanced Continuing Professional Development (CPD) The person undertaking this course has been awarded 2 CPD hours for completing the course and reading the course summary notes.
1 INTRODUCTION 1.1 The law relating to terrorist financing and money laundering is governed primarily by the Terrorism Act 2000 and the Proceeds of Crime Act 2002 and we will be looking at the relevant sections of these Acts in more detail later. 1.2 Regulated organisations such as law firms, accountants and financial institutions are also subject to the Money Laundering Regulations 2007 and as you will discover these require firms like yours to put in place systems and procedures designed to help combat money laundering activity. 1.3 The Law Society has published guidance to solicitors in the form of a comprehensive Practice Note. This guidance outlines the legal and regulatory framework of anti-money laundering obligations in the UK and also offers good practice guidance in relation to the setting up and development of systems and controls to help prevent solicitors being used in a way that facilitates money laundering activity and terrorist financing. 1.4 In October 2009 the Treasury approved the current version of the Law Society s Practice Note and the important effect of this is that now the courts (in considering whether certain offences have been committed by solicitors under the Terrorism Act, the Proceeds of Crime Act, and the Money Laundering Regulations) must now consider whether the Law Society s guidance has been followed. 1.5 You should therefore understand the importance of this guidance. It can be accessed and downloaded via the Law Society s web site and we strongly recommend that you download a copy and familiarise yourself with its contents. 1.6 Throughout these notes we shall refer to the Money Laundering Regulations as the Regulations and the Law Society s Practice note as the Practice Note. 2 WHAT IS MONEY LAUNDERING? 2.1 In simple terms money laundering is a process whereby the appearance of the proceeds of crime is changed in some way with the intention of making it difficult to trace the origin of such proceeds. 2.2 It is important for you to understand, at the outset, that money laundering activity is a worldwide problem. Billions of pounds are laundered every year and often laundered money finds its way into the hands of terrorists and is used to fund acts of terrorism. 2.3 Solicitors are important professionals in the business and financial world and, believe it or not, they are often targeted by sophisticated criminals for money laundering purposes. Client accounts and legal work such as conveyancing, litigation and the setting up of trusts can be a convenient and effective way of channelling illegal money through the system.
2.4 There are three recognised stages of money laundering as follows:- Placement This is where the money launderer needs to find an organisation that will accept funds, which are the proceeds of crime, into the financial system. Organisations with poor controls and systems will be obvious targets. Layering Here the money launderer arranges for the money to be used in some way as part of the transaction or mixed with other funds. This activity is designed to help disguise the original illegal source of the funds. Integration This is the final stage where the funds, which now have the appearance of being legitimate, are integrated or brought back into use and to all concerned the money launderer appears to have funds from a legitimate source. For instance the proceeds of crime might be used to buy a property, acquire a company or even fund and settle litigation. 2.5 So where do you fit in to all of this? Well the simple answer is that you are required to be on your guard at all times when dealing with clients and third parties to mitigate against you and your firm being exploited for money laundering purposes. 3 THE PROCEEDS OF CRIME ACT 2002 3.1 We are now going to look at the UK legislation that governs our current anti-money laundering regime. 3.2 To combat money laundering activity primary legislation has been introduced by way of the Proceeds of Crime Act 2002. 3.3 The underlying objectives of this legislation are to make it more difficult for criminals to benefit from the proceeds of crime; bring to justice those involved in money laundering and related criminal activity; prevent the commission of predicate criminal conduct by targeting the proceeds of crime. 3.4 For the purpose of these notes we are going to concentrate on Part 7 of the Proceeds of Crime Act which governs the following money laundering offences: 1
3.5 We will cover each these offences separately. 3.6 It s a sobering thought but the numbers on the left hand side represent the maximum years of imprisonment that can be imposed following conviction. 3.7 Primary offences There are 3 primary money laundering offence and these can be found in sections 327, 328 and 329. It is important for you to know that these offences really do impact on the way you deal with your day to day work and highlight the need for you to always be on the lookout for suspicious circumstances and understand how you should best deal with such circumstances. These primary offences apply to all persons in the UK and they are as follows:- Section 327 Concealing, disguising, converting or transferring criminal property. Section 328 Getting involved in an arrangement that facilitates the movement of criminal property. Section 329 Acquiring, using or having possession of criminal property. In very simple terms criminal property means any money or other property (irrespective of value) which originates from any form of criminal activity. So how are these offences relevant to you? Most importantly you have to start thinking in terms of making risk assessments about your clients, the work that you do and the source of any funds you may become involved with. You need to be vigilant at all times and on the lookout for criminals who are wanting to launder their ill-gotten gains through your firm. If you know or suspect that criminal property is involved you may be committing one of the primary offences if you continue with the transaction or assist in any way with the movement or use of the suspect criminal property. So what can you do to protect yourself from being at risk in relation to these primary money laundering offences? Well the answer is really quite simple. By law your firm must appoint a Money Laundering Reporting Officer ( MLRO ). His or her main purpose is to consider internal disclosures where there is knowledge or suspicion of money laundering activity. He or she has the responsibility, following receipt of such disclosures, of determining whether external disclosures need to be made to the National Crime Agency and whether consent is required to take any further steps in a particular transaction or retainer. It will not be an offence under any of sections 327, 328 or 329 if a person makes an authorised disclosure to his MLRO and thereafter obtains consent to proceed. Most firms nowadays will have a standard internal form for reporting known or suspicious circumstances to their MLRO. If such a form is not available a written 2
report should be submitted which contains all the relevant details. If you are seeking permission to take further steps in your retainer you should make this clear in your report. A word of warning however! Your professional rules of conduct prohibit you from disclosing information about clients which is subject to legal professional privilege. A tension therefore may exist between your duty, on the one hand, to make an authorised disclosure under the Proceeds of Crime Act and your duty, on the other hand not to disclose communications which are protected by legal professional privilege. This unfortunately does raise complex issues which are often difficult to deal with in practice. To make matters easier for you we suggest that before submitting a formal authorised disclosure to your MLRO you first have an informal discussion with him to ascertain whether such a disclosure is appropriate taking into consideration issues regarding legal professional privilege. Your MLRO should be in a position to guide you as to how best to handle the situation. Now take a look at the diagram below which highlights the matters you should be considering once you have knowledge or suspicion that you may be dealing with the proceeds of crime. Primary Offences Sections 327,328 and 329 Before crossing the red line consider: 1. Could I be dealing with the proceeds of crime? 2. Should I report to MLRO before proceeding? 3. If I report will I be breaching client privilege? 4. Should I seek a waiver of privilege? Consequences of getting it wrong ML Offences Imprisonment Civil liability Code of conduct breaches You will see that there will be some important matters for you to consider. Your MLRO is best placed to provide guidance to you on how to deal with the various issues. The Practice Note contains a detailed chapter on these primary money laundering offences, and the defence of authorised disclosure Your MLRO should be familiar with this. 3.8 Failure to disclose offences Whilst the primary offences require a person to be actively involved in money laundering activity the failure to disclose offences arise where persons working in the Regulated Sector fail to report others who they know or suspect (or have reasonable grounds for knowing or suspecting) are involved in money laundering activity. Therefore the test as to the extent of knowledge or suspicion is an objective one. 3
What is meant by working in the regulated sector? The Proceeds of Crime Act and the Regulations specify that the following work carried out by solicitors is regulated:- all forms of commercial and private conveyancing most forms of company work any work involving the management of client money, securities or other assets any work involving the opening or management of bank, savings or securities accounts the giving of tax advice insolvency work estate agency work It follows from the above that litigation work is not regulated activity, nor is legal aid work. Accordingly if you come by information, in the course of litigation or legal aid work, which causes you to suspect money laundering activity you are not required under the Proceeds of Crime Act to report the circumstances. Notwithstanding this our recommendation is that you should still discuss the circumstances, on an informal basis, with your MLRO and seek guidance as to what action, if any, should be taken. Please also bear in mind that sham litigation should always be reported to your MLRO as this in itself could well involve money laundering activity. We recommend that you assume all the work you do is regulated. Even if it isn t, best practice dictates that, it is safer for you to report all suspicious activity to your MLRO rather than take the risk of committing a criminal offence. Your MLRO will have a better understanding of what areas of work are regulated. Now let s take a look at these specific failure to report offences. There are two main offences under the Proceeds of Crime Act and these are as follows:- Section 330 A person commits an offence under this section if he knows or suspects (or has reasonable grounds for knowing or suspecting) that another person is engaged in money laundering and he fails to report the facts to his MLRO or the National Crime Agency. In law firms the report should be submitted to the MLRO. Section 331 An MLRO commits an offence if, as a result of an internal disclosure under section 330, he knows or suspects, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering and he fails to disclose this as soon as practicable to the National Crime Agency. Unless you are an MLRO you need only concern yourself with section 330. The maximum penalty following a conviction under either of these sections is 5 years imprisonment. To protect yourself from prosecution you again need to be on the lookout for potential money laundering activity and if you become suspicious about someone during the course of your work you should immediately report the circumstances to your MLRO. 4
Again most firms nowadays will have a standard internal form for reporting such circumstances. If such a form is not available a written report should be submitted to your MLRO with all the relevant details. The good news is that once you have reported the circumstances you will be safe from prosecution under section 330. In the case of this failure to report offence you are not required to report circumstances where the information giving rise to your suspicion came to you in Privileged Circumstances Privileged Circumstances means information communicated: by a client, or a representative of a client, in connection with the giving of legal advice to the client; or by a client, or by a representative of a client, seeking legal advice from you; or by a person in connection with legal proceedings or contemplated legal proceedings. We recommend that you have an informal chat with your MLRO, before you submit a suspicious activity report, if questions of privilege arise. The Practice Note contains more detailed information and guidance on the failure to report offences and the Privileged Circumstances exception. 3.9 Tipping off offences We have so far looked at the primary money laundering offences and the relevant failure to report offence under the Proceeds of Crime Act. The remaining offences which are important to your work are those which relate to tipping off. These offences are set out in sections 333A(1), 333A(3) and 342(1) of the Proceeds of Crime Act. The maximum penalty on conviction of a tipping off offence is 2 years. In simple terms if you have made any kind of report or disclosure to your MLRO it may be an offence to disclose this information to any third party. Furthermore if you are aware that a money laundering or similar investigation is taking place or is contemplated it is an offence to disclose this information to any third party. The prosecution will have to show that you knew, or should have known, that your third party disclosure would have the effect of prejudicing any pending or future investigation. Although there are certain statutory exceptions to these tipping off laws we strongly recommend that you do not discuss disclosures or reports, that you make, with anyone unless you are authorised to do so by your MLRO. He will be in a far better position to make decisions on what disclosures (if any) can be made and in what circumstances. The main statutory exceptions to the law against tipping off are as follows:- disclosures within the same firm or undertaking or disclosures to a professional legal adviser disclosures between certain financial institutions within the same group disclosures between regulated businesses disclosures between one professional legal adviser to another professional adviser 5
disclosure to the Law Society or the Solicitors Regulation Authority disclosures made by professional legal advisers to their clients for the purpose of dissuading them from engaging in criminal conduct The Practice Note contains helpful information about the tipping off" offences and how they should be considered and applied in your day to day work. So far we have covered the money laundering offences under the Proceeds of Crime Act We are now going to look briefly at offences relating to terrorism. 4 THE TERRORISM ACT 2000 AND OTHER STATUTORY INSTRUMENTS 4.1 Principal offences The principal terrorist property offences are contained in sections 15 to 18 of the Terrorism Act. They apply to everyone including you. In general terms it is an offence to become involved in fundraising for terrorist purposes or to become involved in assisting in the retention, use or movement of Terrorist Property. Broadly speaking Terrorist Property is:- (a) money or other property which is likely to be used for the purposes of terrorism, (b) proceeds from the commission of acts of terrorism, and (c) proceeds of acts carried out for the purposes of terrorism In the main these principal offences are similar to the primary money laundering offences save that they relate to Terrorist Property as opposed to Criminal Property. As with the primary money laundering offences you can protect yourself by making an authorised disclosure to your MLRO if you know or suspect that you may be dealing with Terrorist Property. The maximum penalty following conviction of any of these offences is 14 years. 4.2 Failure to disclose and tipping off offences The relevant failure to disclose offences are contained in sections 19 and 21A and of the Terrorism Act and the tipping offence in section 21D. All you need to know is that if you discover that someone is involved in any of the principal Terrorism Act offences you must report the circumstances to your MLRO as soon as practicable. These offences of failing to disclose terrorist activity are also subject to the Privileged Circumstances exception which we covered earlier. Tipping off under the Terrorism Act adopts the same principles as tipping off under the Proceeds of Crime Act. The Practice Note contains further information about the relevant provisions of the Terrorism Act. 4.3 Statutory Instrument offences 6
Under the Al Qaida and Taliban (United Nations Measures) Order 2006 you are not allowed to deal with or become involved, in any way, with the funds of designated persons. These are prohibited persons who appear on the HM Treasury Sanctions List. Under the Terrorism (United Nations Measures) Order 2009 you are not allowed to deal with the funds of designated persons or make financial services or economic resources available for the benefit of designated persons. What this all means in practice is that you should be very careful if you receive instructions to act for a person who you discover is on the sanctions list. You may run the risk of committing one or more of these terrorist funding offences. You are not allowed to proceed with any transaction involving a designated person or return funds to such a person without a licence from the HM Treasury Asset Freezing Unit. Your firm should have in place client due diligence measures to ensure that people who instruct you are not on the Sanctions List. You should be aware of these measures. You can contact the Asset Freezing Unit to request a licence or obtain advice regarding financial restrictions or the Sanctions List at: Asset Freezing Unit 1 Horse Guards Road London SW1A 2HQ Telephone 020 7270 5664 Email assetfreezingunit@hm-treasury.gov.uk We have now covered the important statutory legislation relating to money laundering and terrorist financing. We are now going look at the Regulations. 5 THE REGULATIONS 5.1 Although the Regulations only apply to work in the Regulated Sector we believe it is good practice for law firms to have appropriate anti-money laundering systems in place for all areas of work. This approach will help in sending out a consistent message about anti-money laundering prevention. 5.2 The main thrust of the Regulations is all about you and your firm taking steps (and setting up systems) to ensure that you know your client (and any beneficial owners) and fully understand the nature of the relevant transaction when it starts and as it progresses. 5.3 Compliance with the Regulations is compulsory for regulated work and any breach may amount to a criminal offence punishable by imprisonment of up to 2 years. It is very important therefore that your firm has procedures, systems and controls in place and that you follow these at all times. 5.4 It is useful for you to know that the full text of the Regulations can be downloaded from the Government s web site at www.hm-treasury.gov.uk. 7
5.5 Under the Regulations organisations like yours must establish and maintain appropriate and risk-sensitive policies and procedures, designed to prevent money laundering and terrorist financing relating to the following:- customer and transaction due diligence measures and ongoing monitoring the requirements to submit suspicious activity reports and appoint an MLRO the keeping of records internal control risk assessment and management the monitoring and management of compliance with, and the internal communication of, such policies and procedures appropriate staff training 5.6 If you are in any doubt about what systems and procedures apply in your firm you should consult with your MLRO. 5.7 Customer and transaction due diligence Customer and transaction due diligence is all about getting to know your client and/or any beneficial owners and also the nature of the relevant transaction. Your firm will have its own criteria for verifying the identity of clients and any beneficial owners. Most organisations nowadays require production of originals or certified copies of passports, driving licences with supporting utility bills. Others may rely on electronic verification through a government approved data agency. A beneficial owner is usually some person or entity, other than your client, who has at least a 25% ownership or controlling interest in the property or funds you are dealing with. For the full meaning of beneficial owner please refer to the Practice Note. What you should realise is that you must follow your firm s procedures for identifying clients and any beneficial owners and verifying such identification. You should normally do this before you carry out any work on behalf of the client and certainly before you get involved in any financial dealings. Remember that your firm has an obligation to put in place systems and procedures to facilitate customer due diligence and you have an obligation to comply with these. Your firm is required to keep any documents or records relating to your due diligence for a period of at least five years. The Regulations make provision for three types of customer due diligence namely simplified, standard and enhanced. 5.8 Simplified due diligence this will apply when your firm is acting for well know clients such as banks, building societies, major PLCs, government agencies and local authorities. When acting for such clients you can place far less emphasis on verifying their identity. You may for instance in respect of a listed company simply check the list of public companies in the financial section of appropriate newspapers. You may also consider checking out your client s web site as a means of verifying any information provided. 8
You must however still continue to monitor the relevant transaction and satisfy yourself that everything is above board. This includes your being satisfied as to the source of any funds used in a transaction. 5.9 Standard due diligence this should apply to most cases that your firm deals with. This involves you being satisfied as to the identity of your client and verifying such identity from documents, data or other information received from a reliable source. As we have said your firm will have its own criteria for satisfying the standard due diligence obligations. You must be made aware of this criteria and follow it. 5.10 Enhanced due diligence this applies where there are greater risks of money laundering and terrorist financing. Where these greater risks exist your responsibility is to carry out enhanced due diligence. It is sensible in these circumstances, to discuss with your MLRO what extra due diligence measures should be taken. In summary, enhanced due diligence will be required in the following circumstances:- Where you have concerns or suspicions about the client or the nature of the relevant transaction. Where you do not meet with the client as part of the process of verifying identity. Where you discover that the client is a Politically Exposed Person. For further details about Politically Exposed Persons please refer to your MLRO. Where the jurisdiction of the client is one in which no anti-money laundering controls are in place or the controls are regarded as ineffective. The service to be provided gives rises to a high risk. The identity of your client and/or the nature of the transaction cause you to consider a check of the Sanctions List. You will remember that you most likely will need a certificate from the Asset Freezing Unit before acting for someone on this list. Many firms nowadays rely on electronic ID verification checks and these are particularly helpful in determining whether your client is a Politically Exposed Person or is on the Sanctions List. 9
6 RECOGNISING AND DEALING WITH SUSPICIOUS CIRCUMSTANCES 6.1 When carrying out your due diligence it is important that you are alert to any warning signs that something may be wrong. By adopting a careful and risk based approach you will be minimising the potential for you, and your firm, getting involved in money laundering or related activity. 6.2 To assist you in detecting possible money laundering activity we have set out below some examples of circumstances which you should be alert to. Please note that these are not exhaustive and you should always be on your guard and conscious of potential exploitation by money launderers. 6.3 Company/Corporate transactions Company work can give rise to a high risk of involvement in possible money laundering. When setting up or forming companies make sure you are satisfied that there is a good commercial reason for the company formation transaction. Be aware of instructions where a client (particularly one unknown to the firm) simply asks you to form a company and nothing else. This should be treated with a degree of suspicion. Be very cautious if you are asked to serve as a director of a client company. It may be that the client wishes to use you to project a legitimate image. Always check the source of funds being used to purchase shareholdings or other corporate assets. If you discover the existence or setting up of large payments for unspecified services within a corporate structure your suspicions should be aroused. Similarly keep a look out for any dealings that may involve tax evasion. Always be satisfied that each transaction is genuine and consider any significant over or under valuations. Those using companies for unlawful purposes will most likely want to delay filing statutory accounts. If this occurs satisfy yourself that there is a genuine reason for the delay. If a client is using separate solicitors to deal with certain aspects of a particular transaction it may be that his intention is to avoid one set of professionals seeing the overall picture. 6.4 Property transactions Property work gives rise to a high risk of involvement and possible money laundering. Be on guard against criminals using fictitious buyers to obtain mortgages and purchase properties. Unless there are exceptional reasons (which you must be satisfied with) always make sure you meet the client(s). 10
Be extremely cautious where the client indicates that he has or intends to pay a deposit directly to the other party. If there is a mortgage involved you will need to report this to the lender. In addition you must consider money laundering implications. For instance just because the money does not pass through your client account does not mean that you can ignore reasonable suspicion that another person is engaged in money laundering. There may be (and usually are) perfectly proper reasons for clients wishing to re-finance or pay off outstanding mortgages. It does happen however that dirty money is sometimes used for paying off existing mortgages. Make sure you are satisfied that the circumstances of the transaction are legitimate. Always check the source of funds being used to purchase property. Remember that if any part of the funds involve criminal property you could be implicated in one of the primary money laundering offences. Be cautious where the client wishes to use a corporate vehicle to purchase a property. Make sure that there are good commercial or legal reasons for doing this. 6.5 Probate/Private client work On death the deceased can leave a significant sum without attracting inheritance tax. This nil rate band could be attractive to money launderers. Solicitors carrying out probate work should always tell their clients about the need to particularise the assets of the deceased with valuations. Try to ensure that the listed assets did belong to the deceased and that the figures provided reconcile. If it is reported to you that cash has been found at the deceased house ask yourself if this sounds credible. The larger amount of cash found without credible explanation the more suspicion should arise. HM Treasury has identified trust funds as being a factor in many complex money laundering operations. Solicitors must be satisfied as to the commercial reasons for any trust formation. Make sure that you understand why the client has asked for your assistance and ensure that there is an underlying legal service being provided. Instructions where a client (particularly one unknown to your firm) simply asks your firm to form a trust should be treated with a degree of suspicion. This is particularly so where the trust is intended to be off shore. If you are asked to act as a trustee this may be flattering but beware that money launderers may wish to use you so as to project a legitimate transaction. The purchase (or sale) of any asset held in a trust fund can involve a money laundering transaction. Always establish the source of funds and/or the legitimacy of any assets. 11
6.6 General You need to be vigilant at all times and be alert to the possibility of money laundering by clients or third parties. In most situations it should be obvious that the transaction in question is perfectly legitimate. Care should always be taken when dealing with a client who has no obvious reasons for using your firm's services eg. clients with distant addresses who could find the same service near their home base; or clients whose requirements do not fit into the normal pattern of your firm's business and could be more easily serviced elsewhere. If you are in any way suspicious about the circumstances of a particular transaction discuss it with your MLRO before getting the firm involved. There may be good reasons why a client wishes to pay money to your firm in cash. However, it should be a warning signal to you if this happens. You must satisfy yourself that there is a good and legitimate reason for this method of payment. Do not be afraid of asking the client for a full explanation. Always make a note on the file of the explanation and if in any doubt seek guidance from your MLRO. Your firm should have in place some guidelines as to whether and in what circumstances cash payments can be accepted. Under no circumstances must your firm's client account be used except in cases where there is a genuine underlying legal transaction or some other valid reason for client's money to be held. This is a fundamental requirement and should be observed at all times. Solicitors spend large amounts of time and money marketing their services. They are therefore usually happy to take on new instructions but in doing so they should be careful. In the case of new clients check their identity and address. Be very wary of clients who are reluctant to provide these details. Where possible meet new clients in person. Be very cautious about third parties introducing clients who you do not meet. If anything about the circumstances of a transaction give cause for concern then ask more questions. The answers may deal with your initial cause for concern. If they do not, then the answers may give foundation to a suspicion and you may have to consider whether or not the circumstances need to be reported. Sometimes it is the details of the deal itself that just does not make sense. Try to get full details of the transaction, its structure and its funding source before you become involved. If your instructions change dramatically or they change at the last minute be very wary. Watch out if it appears on the face of it that the client is over paying for something or selling something at a significant loss. Another area which should raise warning signals is where the transaction involves the client insisting on paying monies direct to the other party as opposed to through solicitors. Often people may wish to avoid paying tax. Sometimes they attempt to achieve this by laundering money through a solicitors office. You must be careful not to become unwittingly involved in such activity. 12
A client who refuses to co-operate with you about identification and other client due diligence procedures should not remain a client. A client who gives confused and/or misleading identification and other required information about the source and flow of funds should be watched. Be extremely vigilant if a client wishes to use off shore funds for a particular transaction. There may be a very good and legitimate reason why off shore funds are being used but you must satisfy yourself that this is the case. Be wary if the client tells you that he has just won the lottery or has inherited a large sum of money. It may be true but you should seek information to satisfy yourself that it is. A flow of funds through client account that is out of character with your actual knowledge of the financial standing of the client or with the circumstances of the transaction may give rise to suspicion. There may be cases where the client provides instructions and transfers funds to your firm and suddenly, for no obvious reason, the matter becomes abortive and the funds are returned to the client. We are not suggesting that all abortive work should be regarded as suspicious we are simply saying that you should be careful. It is well known that money launderers often use solicitors in this way and accordingly you need to be on your guard. Also be on your guard if a client asks you to simply prepare the paperwork to reflect the transfer of an asset in circumstances where he has already paid the full consideration to the other party. If you know that your client is bankrupt or you have suspicions about his financial position be very wary if the client wishes to deal in cash. Believe it or not money launderers do go to the extremes of inventing legal disputes. This type of money laundering is often difficult to detect but if a case suddenly takes an unexpected turn and settles quickly without any apparent reason your suspicions may be raised. 13