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A look at the new Freelance Solicitor Model

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance / Gill Crennell

In November 2019, the SRA introduced a new model of operating for so-called ‘freelance solicitors’. The intention of the freelance solicitor model was to allow solicitors greater flexibility when providing services. We were told that the changes took place as the regulator felt that the previous arrangements created an unnecessary and restrictive ‘artificial entity’ model around solicitors operating as individuals. Prior to the changes, sole practitioners were required to have their practice authorised as a ‘recognised sole practice’.

What is a Freelancer?

A good starting point is to look at what the SRA means by ‘freelance solicitor’. This term is used to describe a self-employed solicitor who:

is practising on their own;
doesn’t employ anyone else in connection with the services they provide;
is practising in their own name (rather than using a trading name or through a service company);
is engaged directly by the client with fees payable directly to the solicitor;
and without that practice being authorised. So, essentially, we’re talking about individuals who are genuinely self-employed.

Rules and Regulations

Freelancers are subject to various rules and regulations. The three key ones to note are as follows:

The SRA Authorisation of Individuals Regulations 2019 (the Regulations)

You must have practised as a solicitor for a minimum of three years since admission or registration.
You are self-employed and practise in your own name, and not through a trading name or service company.
You must take out and maintain indemnity insurance that provides adequate and appropriate cover in respect of all of the services that you provide or have provided (this includes both reserved and unreserved legal services), and that takes into account any alternative arrangements you or your clients may make.
You are not permitted to employ anyone.
You are engaged directly by the client, and the client pays their fees directly to you.
You may only hold client money in limited circumstances, i.e. when it’s for payments on account of costs and disbursements that you have not yet billed where:
1. any money held for disbursements relates to costs and expenses incurred by you on behalf of your client and for which you are liable, and
2. you have told the client in advance where and how that money will be held.

SRA Code of Conduct for Solicitors, RELs and RFLs (the Code)

Freelance solicitors are regulated in the same way as other solicitors and are subject to the provisions of the Code.

The Transparency Rules

Those freelancers providing reserved legal services are also subject to the requirements of the Transparency Rules. This includes publishing costs information where they offer any the services listed in the rules, publishing details of their complaints’ procedure, and telling clients that they will not be covered by insurance on the SRA’s minimum terms and conditions and that alternative arrangements are in place.

As a more general rule, freelance solicitors will need to ensure that clients fully understand the implications of their “freelance” status and any additional risks to the client. This should include informing clients if they are unable to benefit from the SRA Compensation Fund.

Other key regulations to think about

Freelance solicitors will also need to consider whether they are an “’independent legal professional” (ILP) for the purposes of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017). The MLR 2017 apply to freelancers providing legal or notarial services to others as part of financial or real property transactions. If you are an ILP, you’ll need to comply with the regulations, which includes having a risk assessment, policies and controls and procedures in place. You’ll also need to separately register with the SRA to comply with the MLR 2017.

What activities can Freelancers undertake?

The Regulations differentiate between those performing reserved legal activities and those just providing non-reserved legal activities – essentially differentiating between the areas of law considered riskier and those of low-risk. As you’d expect, the restrictions are more stringent for those undertaking the former. There are six reserved activities which you’ll find listed at Section 12 and Schedule 2 of the Legal Services Act 2007. If you’re planning to work as a freelancer, it’s important that you familiarise yourself with these:

Exercise of a right of audience
Conduct of litigation
Reserved instrument activities (includes conveyancing and linked matters)
Probate activities
Notarial activities
Administration of oaths

Historically, you’ve only been able to provide these types of services as a solicitor through an entity that is authorised to do so. However, if you’re a solicitor practising on your own account, you can now provide these types of services without needing to be authorised as a recognised sole practitioner if you meet the conditions set out in Regulation 10.2(b) of the Regulations.

More on the Restrictions in Regulation 10.2(b)

Experience: Whilst solicitors solely providing non-reserved legal activities don’t need to meet the three years’ PQE requirement, newly qualified solicitors will need to be mindful of the need to satisfy the competency requirements set out in the Code, which still apply.

Employing others: Despite this restriction, the SRA Ethics guidance (“Preparing to become a sole practitioner or a freelance solicitor”) clarifies that this isn’t intended to stop freelancers from contracting with others to provide pure administrative support to help them to provide their services, so long as they don’t “employ” those people. This would, for example, enable you to work in a Chambers model where the Chambers provides administration and other business support. It would also enable freelancers to receive similar services from a serviced office type arrangement.

It’s also important to note that if you do decide to employ someone to assist you in connection with the services you provide (including a paralegal or secretary), your clients will not benefit from protection under the SRA Compensation Fund (see Regulation 5.2, SRA Compensation Fund Rules) – you must be genuinely practising on your own.

Professional Indemnity Insurance (PII): Another apparent rational for the introduction of the revised regime was the SRA viewing that the high cost of purchasing PII on minimum terms was deterring entry to the market of sole practitioners wanting to practise independently.

Now, freelancers who carry out purely non-reserved activities are not required to have any PII. However, prudent freelancers should consider whether having no cover is in their own, and indeed their clients’ best interests. Conversely, freelancers carrying out reserved legal activities must have “adequate and appropriate insurance” in place, but do not need to comply with the SRA’s minimum terms. Cover must be for all of the work done as a solicitor and not just any reserved activities. When speaking with insurers or brokers, it’s advisable to let them know if you’ll be seeing clients at home or working from home on a regular basis, to make sure you obtain appropriate cover. When arranging cover, factors to think about may include an assessment of maximum probable loss for each work type, your claims history (if any; number/type/value/frequency of client matters) and likely client profiles. You should also record how you reached your decision on the level of cover so you can produce this if asked to demonstrate that you meet the “adequate and appropriate” requirement.

Although the cost of insurance can sometimes be prohibitive, freelancers should also consider taking out run-off cover if they decide to stop practising – at least until the risk of claims has fallen away. If solicitors decide to move back into private practice, this may be something that new employers will look for.

Insurers will undoubtedly be looking closely at the risk and compliance framework that freelancers put in place to ensure that any risks are being properly managed before they offer cover; so this is likely to be a key focus for those wanting to take advantage of the new model of working. Here at Teal we work closely with insurers and can help you to ensure that you have an appropriate framework in place that will satisfy your insurers’ requirements. Please do not hesitate to contact us if we can assist.

Restrictions on holding client money: Given the limitations on holding client money, if a client needs to pay or is due to receive other types of client money (such as damages or money from an estate), a freelance solicitor will need to make alternative arrangements to safeguard these funds – for example via a third party managed account such as Shield Pay.

Structures

As a freelancer solicitor you’re strictly prohibited from adopting any kind of entity structure, such as a limited company, limited liability partnership or partnership and can only operate under your own name. This means that you’ll be personally liable for your actions in the same way as a sole trader.

Law Society guidance (see link below) envisages that individuals may consider working together with other like-minded solicitors in a Chambers-style arrangement, with practices complementing one another. Each freelancer in the arrangement remains individually regulated and may, for example, just offer non-reserved legal activities, whilst others may offer reserved activities or perhaps offer both.

The process for getting set up as a freelancer

To get started, you will need to notify the SRA that you intend to practise on your own and whether or not you will be providing reserved legal services. If so, the SRA will then check whether you meet the conditions set out in the Regulations mentioned above.

Risks for law firms

Law firms should consider training staff on freelance solicitors and the implications for firms – for example, given the restrictions on holding client money, freelancers will be limited in the undertakings that they will be able to give.

Given the requirements for freelancers to contract personally for services, and the ban on freelancers holding client money, the SRA considers that the arrangements are unlikely to appeal to a sole practitioner who is currently running a business and employing staff and instead, are more likely to appeal to those who wish to undertake ad hoc freelance work or set up in a chambers style model.

When the new model for freelancers was first discussed, it received a considerable amount of negative commentary in the press, mostly relating to lack of regulation. However, as mentioned above, the Code still applies to all freelancers.

The Gazette reported back in early March 2020 just prior to lockdown, that 71 solicitors had already registered with the SRA as freelancers. The model is likely to be attractive to solicitors with a good client following or with small practices – so clearly poses a threat to firms, although quite how extensive the threat will be, only time will tell.

Useful links

Here are some useful links

Law Society Practice Notes – Click here
SRA Freelancer Notification – Click here
SRA Guidance – Preparing to become a sole practitioner or SRA regulated solicitor – Click here
SRA Guidance – Third party managed accounts – Click here
SRA Compensation Fund Rules 2021 – Click here

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If you’d like to know more about our regulatory services, please contact one of our experts today.

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What is a Politically Exposed Person (PEP) and how do I know if my client is one?

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance, Risk Management / Kayleigh Smale

The SRA expect solicitors and firms to continue to meet the high standards the public expect (which includes upholding the rule of law). It’s therefore important to ensure that all staff are aware of their obligations when onboarding clients, and this includes understanding what a politically exposed person is.

On a number of occasions, we’ve seen panic set in as soon as someone sees the words “match” for their client on a politically exposed person screening request, but there’s no need to panic! Just because someone is classified as a politically exposed person does not necessarily mean they are a “baddie”!

What is a politically exposed person and why are they considered high risk?

A politically exposed person is a person who is or, within the last year, has been a:

Head of State/Government
Minister
Assistant Minister
MP
Member of judiciary
Member of Courts
Member of Auditors
Member of boards
Member of central banks
Ambassador
High-ranking officer in the armed forces
Member of administrative management
Member of supervisory bodies
Member of state-owned enterprises Member of governing body of a political party
Board of an international organisation (for e.g. FIFA)

In addition, a person will also be classified as a politically exposed person if they are:

A member of a politically exposed person’s family
A known close associate of a politically exposed person (whom the politically exposed person is in business with)
A beneficial owner of the politically exposed person’s property (someone who enjoys the benefits of ownership even though the title of the property is in another person’s name)

Why is a politically exposed person deemed high risk?

A politically exposed person is deemed high risk because they generally present a higher risk for potential involvement in bribery and corruption due to their position and the influence that they may hold.

Therefore, the main aim of applying Enhanced Due Diligence (EDD) to work involving a politically exposed person is to mitigate the risk that the proceeds of bribery and corruption may be laundered.

A politically exposed person is also an easy target for identity theft due to a great deal of their personal information being publicly available.

How do you find out if your client is a politically exposed person?

The best way to check whether someone is a politically exposed person is through politically exposed person screening solutions (PEP screenings) online. Many firms already have electronic verification which will normally include PEP screening as part of the checks that are carried out. Some online screening solutions will also provide additional information, such as adverse media and any criminal conduct – a good way to check whether your politically exposed person is a “baddie” or not!

Don’t forget Google, it is amazing what information you might find from a Google search.

The Regulations

Regulation 33 (1)(d) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) states that EDD is required in situations where the client is a politically exposed person, or a family member or known close associate of a politically exposed person. Therefore, it is important to establish whether or not your client is a politically exposed person at the outset.

In addition, under Regulation 35 of the MLR 2017, if your client is a politically exposed person you must:

Get senior management approval for the business relationship
Take adequate measures to establish the source of wealth and source of funds
Closely monitor the business relationship throughout

Get in touch

If you need any assistance when dealing with a politically exposed person, please get in touch and we would be happy to help.

Take a look at the compliance services we can offer or alternatively, get in touch with one of our experts.

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Who should certify client identification documents and what should they check?

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance / Kayleigh Smale

Some of the certifications I’ve seen on client identification documents that fee earners have uploaded as part of their client due diligence checks, have led me to raise an eyebrow.

One of my favourites was a document certified by someone whose occupation was detailed as “Retired”!

Having worked in Risk and Compliance for over 7 years, one question I would regularly hear was “who can certify my client’s identification documents?”.

Firms will have different policies and procedures in respect of this. However, it is worth considering the following points when deciding whether you are happy to accept the certification on a document:

Is the person certifying the documents a professional person or ‘of good standing’ i.e. are they regulated, or do they work in a position of trust?
Is the certifier easily identifiable?
Would you be able to contact the certifier if needed to verify their certification? A bank, building society or post office official could move jobs/professions, making it difficult for you to contact them.
Does the certifier have the relevant skills to know whether what they are certifying is a true original document?
Has the document also been certified as a true likeness?

The majority of firms only accept certified client due diligence documents from a professional regulated person for example a solicitor, a banker or a notary. The reason for this being that they are then able to demonstrate to the relevant authorities, if necessary, that the person in question who certified the documents was of “good professional standing”, easily identifiable to contact if necessary and competent at document inspection and imposter detection.

We had a query a couple of months ago as to whether documents must also be certified as a “true likeness”. My view is that this wording should be used where the document being certified contains a photograph. If the certifier does not stamp a document containing a photograph with the wording a “true likeness”, and states a “true copy” then they are suggesting that they have ONLY seen the original document and therefore the individual who the document relates/belongs to was not present at the time the document was certified. This, to me, defeats the whole point of getting documents containing a photograph certified in the first place!

If you come across documents containing a photograph that are only certified as a “true copy” it is worth double checking with the certifier that the individual was present at the time the document was certified or that the certifier has met the individual in person previously and can confirm that it is a true likeness.

Don’t forget to make sure the document being certified is in date – It’s surprising the number of times I have seen client identification documents that have expired but have been recently certified.

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Man holding up in front of his face a picture of his face

The Benefits of Electronic Verification

Anti-Money Laundering, Blogs, Legal Compliance / Shazia Zamir

The world of electronic verification is an ever-evolving industry, with some providers supporting features like facial recognition, authentication of documents, direct access bank account information, and PEP and Sanctions screening.

Electronic verification should provide you with a level of certainty that the individual is who they say they are and, for corporate entities, that a legal entity exists and has an active company status.

Electronic identification can be used either as part of a wider process or, where appropriate, as the only source of identification. Before using any provider, you may want to consider the following:

The information supplied by the data provider is considered sufficiently extensive, reliable, and accurate.The provider allows users to capture and store the information they have used to verify an identity.

There are several benefits achieved by using electronic identification and verification (EV):

Improved Customer Experience

Using EV can assist in streamlining your current verification process. It can lead to enhancing the overall client experience making it easier for the client to submit identity documents securely in a matter of minutes ready for teams to receive and review.

Quicker Onboarding of Clients

Faster access to transmitted documents can reduce the time it takes to conduct Customer Due Diligence (CDD) and onboard the client. Adopting this approach may also help you carry out a risk assessment quickly to decide whether you would like to act for the client . It may even form part of your decision-making process when assessing any risks during the course of the instruction.

Document Verification

Most current providers allow you to verify documents. If you are interested in this feature just remember your provider is verifying the authenticity of the document having been issued using the machine-readable zone (MRZ code). It is important to remember a documentation verification check is not verifying the identity of the person, it is verifying the document.

Identity Verification

If you are a firm looking to verify the identity of a person some providers offer a different feature which includes biometric data and facial recognition. Here the client is usually asked to take a live photo of themselves using an app and identity documents are uploaded. The picture and identity documents are compared by the system and all including the results are transmitted electronically to the firm as a pass/fail. The system is verifying the identity of the individual, which can help firms address issues where obtaining a correctly certified identity is a concern.

Clear Audit Trail

UK/EU providers are usually GDPR compliant, offering you a secure place to save all searches for a period of time, and helping you demonstrate a clear audit trail. Remember to check that your terms and data protection statements specify the use of authorised third parties to process personal data.

Increased Accuracy

Automating your CDD process can make a manual task easier to manage and give increased accuracy. Politically exposed persons and sanctioned designated individuals/entities are automatically highlighted as risks. In addition, automating your take-on process by using digital technology to compare documents can improve quality and eliminate human error when comparing documents using the untrained eye.

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Two front doors. One with a correct number and one with a made up number

Preventing a repeat of Dreamvar

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance / Kayleigh Smale

Dreamvar – more than a year on …….. so, what has changed?

It’s likely most conveyancers will shudder when they hear the name Dreamvar. It’s the case that changed the liabilities and responsibilities of lawyers and conveyancers when dealing with residential property transactions. But in practice, what has actually changed since this case?

Firstly, a brief background for those unfamiliar with the details of the case. The case involved the liability of solicitors in cases of identity fraud. A fraudster posed as the seller of a property in London worth about £1million and succeeded in selling the property to an innocent buyer, Dreamvar. Once the property was sold the fraudster seller and the purchase monies disappeared. Dreamvar went on to sue his solicitor, for negligence (in contract and tort) and for breach of trust. He also sued the fraudster seller’s solicitor in negligence, for breach of warranty and breach of trust.

The High Court ruled that only Dreamvar’s solicitor could be liable and dismissed all claims against the fraudster’s solicitors. This seemed a little harsh given the solicitors acting for the fraudster had not taken sufficient steps to verify their client’s identity as required by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

The case therefore eventually made its way to the Court of Appeal. The Judge ruled the solicitors representing the fraudulent property vendor should share responsibility along with those representing the duped buyer of any losses. The Court of Appeal ordered both firms involved to make financial contributions.

However, it wasn’t just the solicitors involved that were in the firing line, the Law Society was also criticised. The case discussed the Law Society’s Code for Completion by Post (“The Code”) and argued that its processes did not consider the prospect that a sale is not genuine.

The Law Society agreed that their Conveyancing Protocol (“The Protocol”) and The Code needed updating and confirmed they intended to take the courts comments into account when making the amendments. And true to their word, the Law Society updated The Code and The Protocol this year.

The Law Society have made it clear that there are no changes in substance to the Code. Their revisions to the Code aim to make it clearer that the seller’s solicitor only gives undertakings where there is a genuine sale, thereby providing better protection for purchasers.

Similarly, with The Protocol the Law Society confirmed the number of steps have been reduced, however the obligations under the Protocol remain the same. They have made some procedural changes that you should be aware of, especially if are acting for the seller. In particular, the Protocol now states that Solicitors in CQS firms who are acting for the seller must

Obtain instructions for dealing with remittance of gross/net sale proceeds and details provided by the seller of UK bank account for remittance of proceeds. Obtain evidence that the bank account is properly constituted as an account conducted by the seller for a period of at least 12 months. Confirm that remittance will be made to that account only.

This means the solicitor must, if they are a CQS firm, request details of the bank account for the sale proceeds and they must also obtain evidence that the account belongs to the seller, showing that they have had and been using the account for at least 12 months.

This is a great way to ensure the purchase funds are going to the correct person! Only last month a woman named Sarah Broadbelt was jailed for 20 months for fraud and possessing a false identity document, after she sold a property for £75,000 back in 2015, without the real owner knowing. This case shows the lengths criminals are willing to go in order to commit this type of crime. Broadbelt went as far as changing her name by deed poll to that of the property owner’s so that she could apply for a passport and open bank accounts! That is real dedication!

Had the new Protocol and Code been in place (and been followed) it would have been far more difficult for Broadbelt to pose as the real owner of the property given that she, as the seller, would have been required to provide at least 12 months bank statements to show that not only was the bank account in her name, but it had also been in use by her for those 12 months.

So, what should you be doing now?

If you haven’t already, review The Protocol and The Code and ensure you have the right policies and procedures in place to enable your staff to follow them – do your firm and staff know about the need for further details about the seller’s bank account?

Don’t forget to communicate the changes to the relevant staff – there’s no point in updating policies and procedures if no one is told they have changed (they don’t have a crystal ball!)

Even if you are not CQS Accredited, it is good practice to follow The Protocol and The Code, it is not only there to protect your client and your firm but you as their solicitor/conveyancer too!

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Someone speaking at a conference with a room full of delegates

Ark Group Conference Panel

Anti-Money Laundering, Blogs, Legal Compliance / Amy Bell

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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Lettered cubes spelling out the word "Consent"

Teal Tales: Consent for missing CDD information

Anti-Money Laundering, Blogs, Legal Compliance / Amy Bell

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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Ten and twenty pound notes (sterling) scattered

New Government focus on AML

Anti-Money Laundering, Blogs, Legal Compliance / Emma Willis

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.

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.
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?
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.
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.
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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British pounds - notes and coins scattered

The human cost of money laundering

Anti-Money Laundering, Blogs, Legal Compliance / Dora

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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Identification: The differences between AML, KYC, CDD & CID

Anti-Money Laundering, Blogs, Legal Compliance / Amy Bell

Call me pedantic, but I like precision when I’m talking about compliance. Don’t get me started on 5MLD (which does not currently exist!).

Yesterday I was invited to speak at the Internet of Agreements conference on Identity. I was giving the legal perspective, specifically around AML/KYC.

The audience was, in the main, people working on blockchain solutions. It was absolutely fascinating to be in a room with people trying to solve issues with technology, and this group specifically were concerned with ensuring people involved in a blockchain contract could trust the other person was who they said they were.

Most of the technical content went over my head if I’m honest, I don’t know one end of code from another!

Of course identity from an AML perspective has a very specific meaning and purpose, and it became clear to me that having been immersed in this regulated world for 13 years, that perhaps other people don’t appreciate the nuances of it. If people are looking to create solutions, then they need to understand the problem.

The terms CDD/KYC/AML are used interchangeably by non AML people, to mean the same thing, that one approach to identity will work for all three, but I hope I explained yesterday that it’s not that straightforward, and on reflection, I think we should all be mindful of the difference.

AML – Anti money laundering, does what it says on the tin, an AML policy is a policy which sets out how you are going to prevent money laundering. An AML procedure will be something you have in place to prevent money laundering.
KYC – Know your client, this is understanding who your client is, what their goals are, so you can advise them properly.
CDD – this is a combination of identity verification and understanding the purpose and nature of the business relationship you have with the client, both at the beginning of the matter and ongoing.
CID – Client ID – this is identifying and verifying your client based on documents or information which is independent of the client.

The reason I think it is important to break this down into these 4 parts is that CID does not prevent money laundering. It might prevent identity fraud, but not money laundering. Baddies live somewhere. CDD does not necessarily prevent money laundering. Sure, if you are carrying out source of funds enquiries you might see something which might make you suspicious and withdraw from acting, but we don’t always, when conducting CDD ask for or have the full picture of the client’s affairs.

KYC is more likely to prevent money laundering. Getting to know your client, understanding how they have made their money is where you will detect money laundering. Understanding their past transactions and business activities is where you will spot suspicious circumstances.

Therefore, as I said yesterday, CID is important, it’s required by the law (so the Police know which door to knock on to find your client), but if we deploy AML policies which are just designed to comply with CDD requirements we will miss signs of money laundering. We should be looking to understand the client’s source of wealth as well as funds if we want to disrupt money laundering. We should understand how have they got to the position they are in today, and what are their plans for the future. This is not only good businesses sense in terms of ensuring your advice meets properly the clients needs, but will make it more difficult for the criminals to use you to launder money.

There are a lot of very interesting companies trying to provide Client ID solutions for AML, but if you’re one of those clever techy people I would urge you to consider what can be done to prevent money laundering rather than just making compliance easier – although that’s great too!

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