Anti-Money Laundering

I attended the Ark Group Annual AML Conference in London yesterday to speak on the panel about the challenges for MLROs who are also fee earners in their firm.

The session posed questions to the audience, and we, the panel, put our two penneth in.

Joining me on the panel was Alex Ktorides from Ince Gordon Dadds, Colette Best from the SRA and the chair was my Taskforce colleague Guy Wilkes

The first question was about how challenging MLROs find combining their compliance obligations and fee earning roles.

Most voted very challenging, (4 out of 5), which I absolutely agree it can be. Interestingly, if unsurprisingly, nobody voted it not challenging!

The main points I shared were:

Culture is key – without strong support and a culture of buying into Compliance you will fail. If we fail to tackle non compliance in firms, our compliance programmes will collapse! Colette agreed, where a firm has a person who refuses to comply, they will expect a firm to deal with it and may themselves deal with that individual.

Don’t put things in your policies which you know don’t work – don’t set yourself up to fail. Check things work, introduce controls so you know things work. Don’t leave things for the SRA to discover. Make sure people can make an assessment of risk when you ask them to, don’t say people can’t open a file without the client ID if you know that’s impossible.

Have controls so you aren’t caught out. Audit the controls. If you let fee earners open a file before client ID is completed, make sure you’ve set a deadline and that that is monitored and enforced.

Litigation need to know too! Don’t forget to make sure your litigation teams also have AML training and appreciate the risk that on boarding a client they are happy to deal with may cause AML issues if they also instruct the firm to carry out transactions.

Get a process in place for source of funds and source of wealth. Tell your teams they won’t spot money laundering if they think the extent of their obligations is to get a passport and utility bill, that’s doesn’t prevent money laundering #baddieslivesomewhere!

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We get many calls from firms who have unusual compliance queries. They are my favourite calls!

Today’s tale is a common one, and the issue it raises is a common misconception. In fact, we had 2 calls about this on the same day, with similar issues.

“We’re ready to complete, there is a third-party funder, we’ve asked for source of funds information, but it’s not forthcoming. Can I get consent?”

The answer to that question will depend on the facts of each case, and whether there is a suspicion of money laundering.

Quite often in these situations I ask the firm what they are suspicious about, they will say, the fact the clients are refusing to provide the information is making me suspicious. And that is true.

However, consent, or a defence against money laundering will only be given if there is a suspicion of money laundering; for there to be money laundering, you need to know or suspect there is criminal property.

So, the next question I ask is what is the suspected criminal conduct, and very often the answer is, “I have no idea” or “I don’t think there is any”.

If the firm can not detail on the Suspicious Activity Report what they think the criminal property is, and the suspected criminal conduct from which it is thought to have come from, the NCA are unlikely to accept it as a valid SAR.

Having no idea won’t get you there, you won’t have the relevant suspicion.

If you can’t get consent for missing CDD information, what can you do?

Regulation 31 stipulates that you must not establish a business relationship with someone for whom you can’t complete your due diligence enquiries. So, if you’re in a position that you can’t complete your CDD enquiries because of an uncooperative client or third party, you may need to withdraw.

Many people who contact us about this are concerned about how to explain to their client without telling them they are suspicious. If you don’t already, you should consider setting out your source of funds and wealth policy at the very beginning, explaining to the client the depth you are likely to go to and then if they do not provide the information, you can point to the policy and withdraw from acting.

If you are already in receipt of funds, the situation will be a lot more difficult, you may need to press the client further for the information, and keep returning to the question, do you suspect any criminal conduct.

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If you have compliance questions and need help, why not try our Ask Teal service. For more information, contact our experts today.

When I decided to start ABC and Teal I was very clear about one thing. I will not scaremonger, use fear to sell our services.

In compliance there are serious consequences for failing, massive fines in Data Protection and custodial sentences in AML, not to mention striking off by the SRA!

But you all know those things. You don’t need me to tell you that compliance needs to be effective in your firm to mitigate the risks of these consequences.

The consequences often seem very remote – unlikely, not something that will apply to me – and I think that is correct most of the time.

However, I have woken this morning to more criticism of our profession by Ben Wallace, Security Minister, saying solicitors must do more to prevent money laundering, and that failure to report will lead to sanctions and prosecutions.

I sat in a meeting this week, as I do many weeks, with lawyers who do not recognise this criticism of being professional enablers or of under reporting. Who don’t understand why they are being criticised, or “tarred with the same brush”.

Today’s message from government is clear – professionals who enable money laundering will be scrutinised, and there is a high probability of action.

My message today is this – MLROs/COLPs/MLCOs – ask yourself these 5 questions to establish whether you are confident your firm is doing enough.

1. Are you confident your policies and procedures are effective? Have you had any examples where something should have been spotted earlier, particularly if you have had a production order about a case.
2. Are you confident all issues are reported to you? Have you had any reports from the high risk areas? If not, are you confident staff know what to look for?
3. Do you turn cases away because you have concerns about the due diligence, source of funds? If the answer is yes you can point to evidence which says your risk assessment process works in weeding out suspicious cases and stopping money laundering.
4. Does your CDD procedure properly consider the source of funds? Often CDD is mainly focused on Client ID – which does not prevent money laundering. You need to be able to demonstrate you have considered the source of funds and wealth and thought about any red flags.
5. Are you confident on the law, what you must report, what the level of suspicion is, how to report?

If any of these answers are no, I would urge you to address them urgently.

Help is available on the Law Society website, the updated guidance from the Legal Sector Affinity Group is essential reading.

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It is very easy to silo oneself when immersed in the world of investigating money laundering and to forget that actually it isn’t just about currency, commodities and hidden profits, but it’s about people.

I have investigated a plethora of cases during my career and the focus is usually centred upon the villain and the criminal gains. How often do we actually sit down and examine how many people have been damaged along the road to the conviction? We get the conviction, we take back the proceeds of crime via the machinations of POCA and we send the villain to jail. Do we know what happened to all the others that were affected somewhere along the way to the Courtroom steps?

Just like fraud, I have often heard people say that it is a victimless crime. This couldn’t be further from the truth.

Money laundering is a crime that many people consider irrelevant to them. If it is a problem at all, they consider it is a problem only for banks. That is far from true. Money laundering has massive effects, not only on financial institutions, but also on governments, industries, economies and also individuals.

What are the effects of these widespread crimes that fly under the radar of much of the population? And why are these effects so massive?

To understand the reasons you need to understand the nature of money laundering. It is not an overt crime like robbery or assault; it is secretive and buried under multiple layers so as to avoid detection. It is also not headline news. How often do you see a laundering case at the top of the News at Ten? It’s not a headline grabber and so the consequences of this crime also get buried in the myriad stories about Brexit, Russian Spy Poisoning and Britain’s Got Talent!

Have you ever stopped to consider what might be under your nose when taking a stroll through the main street of your town or through a large, out of town shopping mall? Have you ever considered the rise and proliferation of the nail bar?

That is not to cast aspersions over every nail bar in the land, but have you ever considered how a business, with seemingly very few customers in an area of high business rates, is able to sustain itself?

I have investigated a number of cases involving nail bars. They are often used as a ‘front’ for cannabis farms. These farms are often linked to organised crime, often of Asian or Vietnamese origin.  The profits of the sales of cannabis are often laundered by creating fictitious sales or customers on the books. A simple scheme where no one is really hurt?

Cannabis farms don’t run themselves. The crop needs tending. Organised criminals don’t employ a local firm of horticulturalists. They often turn to human trafficking to find their staff.

When Police conduct search warrants at these cannabis farms they usually find a single male ‘gardener’ on the premises, locked into the building and controlled by others who are higher up the food chain. This male is usually living in fairly squalid conditions, sleeping on a camp bed if he’s lucky, and left only with sufficient food and water to exist. The ‘gardener’s’ sole function is to tend to the lucrative crop. There will be no pay or rewards beyond basic existence.

This is the reality of laundering. A person who has been trafficked. A prisoner in a foreign land with no rights or standing. They may actually have a better standard of living than in their homeland and do not view themselves as victimised, but a victim they are.

Money laundering and financial crime hurts real people.

Money launderers need to engage with professionals to enable their funds to be assimilated into a legal system. As professionals in this arena you will come into contact with launderers. They will want your assistance.

By engaging with launderers, whether knowingly or unwittingly, you become part of the problem.

Perhaps you may now look differently when engaging with some businesses. What lies beneath?  Think……..What can I do about it? What should I do about it?

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We assist firms everyday with practical advice on AML and on how to spot the signs of money laundering in real life.  Contact us today for more information.

 

Regulation 21 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 requires that a firm which is regulated, implements internal controls where appropriate to the size and nature of the firm.

These controls are:

1. Appoint a person to be responsible for compliance with the regulations
2. Screen relevant employees, both before the appointment is made and ongoing thereafter
3. Establish an independent audit function

So, what should the ‘controls’ look like and what is the appropriate ‘size and nature’?

Controls

In my experience, in legal services we don’t have many controls in place. Our colleagues in other industries, such as financial services have lots. A control exists to check the efficacy of a policy and procedure. By way of an example, I am betting your firm has a confidential waste policy, “you must not put client information or confidential data in the normal waste paper bin”. You will have a procedure which says “You must put confidential waste in the bin for confidential shredding”. Very few firms however have a control which says “we will check the waste paper bins weekly to ensure that no confidential data has been put in there”.

It’s great to have policies and procedures, but we usually only find out if they are effective when something goes wrong, by which time it’s too late to avoid the damage that the policy and procedure was designed to avoid.

The Regulation 21 controls are designed to make sure you have someone who is tasked with making sure that the regulations are complied with, we have people who know how to comply with them, and that we check that they are working.

Size and Nature

Implementation of these controls depends on the size and nature of the firm. When we were drafting the guidance at the Money Laundering Task Force we grappled with how does a firm decide on the size and nature. It’s not an easy thing to define. The Legal Sector Affinity Group decided on:

Factors you may consider when determining whether it is appropriate to apply those controls include:

• The number of staff members your practice has

• The number of offices your practice has and where they are located (including whether your practice has overseas offices)

• Your client demographic

• The nature and complexity of work your practice undertakes

• The level of visibility and control that senior management has over client matters

(taken from the draft Legal Sector Affinity Group Guidance).

Sole practitioners who do not employ any staff are not caught by this by virtue of regulation 21(6).

In practice, I think firms will have appointed their COLP as being responsible for compliance (which is arguably already their job by virtue of the SRA authorisation rules). I think firms will be obtaining references for new staff, at times carrying out more rigorous criminal records type checks, and will be thinking about testing staff understanding after training courses.

I think less straight forward is establishing whether a firm needs an independent audit function. My personal view, (rather than of the Law Society) is that a firm does not have to be very big in order to be required to do this. Take this example, a firm that has about 50 people, across 2 offices, with all the staff collecting and recording their own due diligence, and lawyers making decisions about what sorts of inquiries to make regarding the purpose and nature of the transaction. Does the MLRO know that his policies are adhered to and are effective? If, hand on heart, he would say no, an audit would give him that visibility. The mischief the control is trying to get at is to ensure that the firm knows if the Policies, Controls and Procedures they have in place are working.

So if you decide you are the size and nature to need an independent, who is going to do it?  Do you have staff the with requisite knowledge and capacity to carry out the audit? Are they able to acting independently? I think that resourcing alone would be a struggle for many of the smaller firms, and indeed a fair few of the larger firms, who might have an audit function, but without the necessary experience in AML.

An audit should include review of the policies and procedures, interviewing staff and reviewing files and accounts processes to ensure that the policies and procedures are deployed correctly.

Help

With that in mind, we have put together a package of support for firms who can’t resource their audit internally. We can:

• Review existing policies and procedures, including firm and matter risk assessments

• Carry out on site review of systems, policies and procedures

• Interview staff members to test understanding

• Provide feedback of observations and recommendations for improvement

In addition we can help

• Rectify policies and procedures

• Develop controls to ensure constant visibility as to compliance

• Provide tailored in-house training to all staff members to embed learning

• Provide ongoing support and monitoring

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If you are still unsure how the AML size and nature test applies to your firm, get in touch with one of our experts today.