The following is part of on-going series of articles which examines the role of lawyers in facilitating money laundering. Start the series here.
The UK as a leader in anti-money laundering regulations
Money laundering and terrorism financing are matters of global concern, but application of global standards to fight these financial crimes can differ greatly when it comes to the role of lawyers. While the US legal community has for several years resisted more aggressive anti-money laundering (AML) obligations, the United Kingdom has become a leader.
As a current member of the European Union, the UK benefited from the continent’s embrace of the Financial Action Task Force (FATF) recommendations for strengthening the role of financial gatekeepers as adopted in the
Third Money Laundering Directive of 2005 (3rd Directive). The 3rd Directive mandates detailed identification and verification due diligence processes and the filing of Suspicious Activity Reports (SARs). In the US, these requirements are generally considered to be primarily applicable to financial institutions and are implemented pursuant to the US Bank Secrecy Act.
However, in the EU, the 3rd Directive applies to all lawyers when they participate in certain financial or real estate transactions, including the creation or management of shell companies. It does not apply if lawyers are representing a client in judicial proceedings or in the course of ascertaining a client’s the legal position.
The 3rd Directive was implemented in the UK by the Money Laundering Regulations 2007 (MLR).
Regulation 3 of the MLR specifies that it applies to “independent legal professionals” acting as a firm or sole practitioner who participate in financial or real property transactions and also to tax advisers, insolvency practitioners, trust or company service providers and estate agents. The MLR forms an impressive artillery to combat money laundering in the legal profession together with the Proceeds of Crime Act 2002 (PoCA) and the Terrorism Act 2000.
In addition to a strong legislative framework for lawyer compliance, the Solicitors Regulation Authority (SRA), the UK’s version of the American Bar Association (ABA) and regulator of some 10,300 law firms and 170,000 solicitors in England and Wales, has advocated for even greater lawyer responsibility.
UK Solicitors have an obligation under
Outcome 7.5, one of the many principle-based rules in the SRA Code of Conduct, to "comply with...anti-money laundering...legislation". The SRA has engaged in extensive reviews of law firm AML controls and policies, and made money laundering a priority risk for 2016. The SRA’s May 2016
Anti Money Laundering Report provides innumerable insights to best practices and compliance risks for lawyers.
Money Laundering Reporting Officers
Solicitors’ firms that conduct work regulated by the Money Laundering Regulations are required to have a ‘nominated officer’ to receive and make disclosures to the UK National Crime Agency (NCA). These officers are commonly referred to as the Money Laundering Reporting Officer (MLRO). The MLRO is responsible, among other things, to implement AML compliance policies, procedures and controls, evaluate internal SARs and report them to the NCA.
Not only is it surprising to see that each law firm examined by the SRA in 2016 had an MLRO, but the SRA took this responsibility so seriously that the first weakness identified was that “many of the smaller firms, and also a number of the larger firms, did not have a deputy MLRO or a contingency plan in place to provide cover in the MLRO’s absence.”
Law firms that conduct work regulated by the MLR
must apply CDD on a risk-sensitive basis when they establish a “business relationship” with a client, carry out an occasional transaction, suspect money laundering or terrorist financing, or doubt the veracity of identification documents previously supplied. Firms
must apply Enhanced Due Diligence (EDD) and ongoing monitoring in matters that present a higher risk of money laundering or terrorist financing, where the client has not been physically present for identification purposes or the client is a PEP.
Despite the distinction between unregulated and regulated work, the SRA has
found that many firms apply CDD for all clients, which allows the firms to shift their scope of engagement without worry. The SRA highlighted the establishment of a centralized, accessible and user-friendly CDD database and procedures for on-going monitoring for as best practice. Another interesting finding what that some firms actually were charging clients for CDD as a line-item expense, which will likely spark the envy of many financial institutions who incur this cost at a greater frequency.
Suspicious Activity Reports
UK law firms are required to submit SARs to the UK National Crime Agency in accordance with legislation contained within the Proceeds of Crime Act. According to the SRA, SARs submitted by law firms in 2014 dropped to less than 1% of all SARs nationally, and equated to only 0.3 SARs per firm per year. UK solicitors opined that this likely was due to a better understanding of what needed to be reported and a general slowdown in business. But they also were less likely to work with clients when there was a suspicion of money laundering at the outset, a trend which aligns with financial institutions’ trend of “de-risking.”
Future additional obligations
Additional AML obligations are on the horizon when the EU’s
Fourth Money Laundering Directive (4th Directive) is implemented in mid-2017. The 4th Directive will, among other things, expand the definition of politically exposed person (PEP) to cover domestic clients, require enhanced due diligence (EDD) for all transactions involving PEPs, and lower the monetary floor for conducting Customer Due Diligence (CDD) (from €15,000 to €10,000).
The UK is thought to have “gold-plated” the 3rd Directive, and therefore already established a stronger-than necessary framework which now requires few substantive changes to meet the 4th Directive. In March 2015 the UK also established of a
public register of “persons with significant control” over companies under the Small Business, Enterprise and Employment Act 2015, which gives it a good head start on implementing the 4th Directive’s requirements for determining ultimate beneficial ownership. This register, as well as those required to be established by all of the member states, should help make determining beneficial ownership easier for law firms.
In addition to using the 4th Directive to tidy up existing policies, the IBA
recommends that UK law firms should amend their procedures to treat domestic PEP clients or clients whose beneficial owners are PEPs as high risk and ensuring procedures are in place to record beneficial owners with more than a 25 percent interest. Law firms should also make sure that the renewed emphasis on using a “risk-based approach” is firmly entrenched in their policies, including proper documentation of their risk assessments and highlighting risk-based approaches in their internal training.
Are UK lawyers now the AML gold standard?
As mentioned, the UK is thought to have “gold-plated” the 3rd Directive by adding greater regulatory requirements than necessary, and applied relevant obligations to lawyers. This is in contrast to some other EU countries such as France (which, for
example, has mandated that the President of the French Bar vet all SARs before they are escalated to its anti-money laundering agency, Tracfin).
The UK’s zeal for fully implementing the FATF recommendations could easily make them the “gold standard” for AML regulation of the legal profession. Indeed, if the ABA ever relented, US lawyers would quickly look across the pond for guidance on establishing their own CDD and SAR programs.
But as any lawyer knows, the existence of laws and regulations does not promise that lawyers will necessarily read or follow them. The SRA’s manager of regulatory management
admitted in 2014 after an audit of 375 firms of finding “genuinely shocking” cases of money laundering by law firms and that “landmark” money laundering cases “will become public knowledge when the disciplinary process has taken place.” The good news, in comparison to the US, is that an audit was actually conducted.
No legal or accounting advice is provided hereunder and any discussion of regulatory compliance is purely illustrative. The views expressed herein are the author’s and do not reflect the views of NICE Actimize.