Professional Enablers ..........
When Security Minister Ben WALLACE MP announced three weeks ago a new crime strategy to tackle the increasing flow of illicit funds being processed through the UK economy, certain sectors came under fire once again for perceived failings in their efforts to combat money laundering. The legal sector was one area singled out for criticism in the role it plays in allowing those who seek to launder funds through the financial system.
The Law Society had already been angered by what it perceived as a slight on its members when Donald TOON the Director of the National Crime Agency branded certain sections of the legal profession “Professional Enablers”. TOON cited weaknesses in the level of customer due diligence being undertaken by solicitors as one of the major failings. The latest UK Anti-Money Laundering National Risk Assessment announced in October 2017 seemed to support the statement of TOON when it placed the risk attached to the services of the legal profession as ‘High’. So, what exactly is the true picture, and how much of a risk does the legal sector present when it comes to money laundering?
What is not in doubt that those that seek to launder funds need the level of expertise and services offered by law firms to establish some of the avenues for laundering money such as the establishment of Trusts and company formation, the two vehicles used most frequently. The anonymity that these entities provide together with the potential of complex infrastructures are exactly why they are the preferred method of choice for those with criminal intentions. The task of unravelling these organisations can be problematic and highly time consuming, but nevertheless essential when it comes to effective due diligence. One thing is for certain, money launderers don’t want to be seen or heard and having no intention of putting themselves in a position to be identified as the front of a criminal enterprise.
The issue of customer due diligence is at the heart of effective anti-money laundering procedures, and key to that is establishing a source of funds. Firms certainly need to employ robust questioning around this subject because if a money launderer can have one thing on their wish list it is access to a Solicitor’s client account. Funds transferred from a law firm’s account give “dirty money” the appearance of legitimacy and funds that have been approved as such. It is imperative that firms protect this aspect of their business at all costs and don’t get caught up in a transaction that proves problematic when it comes to the proceeds of crime being deposited into a client account. Therefore, prevention of funds crediting an account is far more preferable than having to deal with them after they’ve been received, and this can only be achieved by potentially posing what a solicitor deems the difficult question in the first instance.
The effective reporting of suspicious activity is another key element in the fight against money laundering but there is no doubt the present system doesn’t work. Too many firms see the reporting procedure as an excuse for their own CDD failings, and just under half a million SAR’s being reported last year and reviewed by just 80 Analysts in the NCA tells its own story. Regulated firms must understand that there is a difference between what is unusual and what is suspicious. Marketing campaigns by regulators when they encourage obligated entities to “Flag it Up” have a purpose but without understanding why, who and what is being flagged up very little real purpose. As the old cliché goes quality rather than quantity is what really counts.
The SAR regime is currently under review and the Law Commission reported in July this year that ““A reporter’s subjective suspicion may be irrational, illogical or based on slender evidence. This may weaken the value of any potential disclosure and have a severe and unwarranted financial impact on the subject of the report”. A key proposal is that reports should show a ‘reasonable grounds for suspicion’ as opposed to just mere suspicion. In practice this will mean that firms will have to set out clearly what are the ‘Red Flags’ that have led them to arrive at the suspicion as opposed to this just “doesn’t feel right so I’ll make a report”.
Times are changing for sure when it comes to anti-money laundering, and law firms just like other regulated sectors can no longer just hope that it will pass, because the spotlight is on regulated entities like never before. The stakes are simply just too high for a firm not to meet its anti-money laundering obligations and that’s without even mentioning ‘Unexplained Wealth Orders’……