Money laundering to change again

Draft Money Laundering Regulations 2007 have been issued to implement the Third Money Laundering Directive. The consultation period on the draft regulations has ended and we await the outcome. Probably the highest profile issue raised in relation to the directive which was not addressed by the draft regulations relates to the definition of “beneficial ownership”, the difficulty of knowing how to comply in many trust situations and the fact that failure to comply carries criminal sanctions. While the Society awaits the outcome of the consultation, we are also engaging with the Treasury and with other regulators.

The government has established the Joint Money Laundering Steering Group (JMLSG), an anti-money laundering supervisors’ forum, of which the Society is a member. One of the main aims of the forum at this early stage is to ensure each sector has sound and coherent guidance which is consistent across all sectors. There is guidance already published by the JMLSG which is approved by the Treasury. The guidance has a general section dealing with items that may affect all sectors, followed by sector-specific guidance. There seems little point in reinventing the wheel, and the Society has proposed that the JMLSG guidance is adopted with additional guidance for areas such as professional privilege, which are “sector-specific”.

We will keep you advised as matters progress.

What is the “new regime”?

The Money Laundering Regulations 2007 are scheduled to come into force on 15 December 2007.

The aim of the regulations is to have the most appropriate and proportionate measures to deter, detect and disrupt money laundering and the financing of terrorism.

A major difference is a move away from a “tick box” system to a risk based and proportionate system. To assess risk in relation to types of client, types of business and in individual cases takes a greater understanding of the objectives of the anti-money laundering regime; and greater knowledge of how money launderers operate, and how they interact with Scottish solicitors, requires senior management within firms to take a much more active role than they may have done previously. Future articles will address these issues in more detail, as well as providing information and guidance on the draft regulations.

Next month we will consider customer due diligence in more detail, which incorporates both verification of identity and knowing your client, and introduces the concepts of enhanced and simplified due diligence.

Where to find it:

• Implementing the Third Money Laundering Directive: Draft Money Laundering Regulations 2007: www.hm-treasury.gov.uk
• JMLSG Guidance: www.jmlsg.org.uk

How to identify money laundering issues

Most solicitors know instinctively when something feels wrong about a transaction. If your instincts are giving you any warnings about a client or transaction, ask yourself the following questions:

• Has there been any reluctance on behalf of the client to provide adequate ID? A common theme amongst money laundering problems that reach the Professional Practice helpline is endless promises to provide ID, which is then provided at the last minute and given little or no scrutiny.

• Why has the client at a late stage advised that a third party will be stepping into their shoes in the transaction/providing the funds? Both of these events are clues that should be a concern.

• Does the client appear to have a deep understanding of the money laundering regulations? This is beginning to appear as a concern, on the simple principle that some criminals are very good at being criminals.
• Is the client proposing a transaction which is unnecessarily complicated? The stock explanation for complexity involving five offshore companies, each with further layers of corporations as directors and shareholders, two family trusts and a telegraphic transfer of money from a bank account in Nigeria is that it is for "tax reasons". Ask to see the tax advice upon which the whole proposal is based.
• Why have I been chosen for instructions on this particular matter? Another common thread with money laundering problem cases is solicitors being engaged to do work outwith their normal sphere of expertise. Do not be flattered but consider the money laundering implications and also issues of general risk management.
• Why is a client so disinterested in the proposed level of fee? If a significant sum of money is being laundered, criminals tend to regard fees as irrelevant.

What to do if you are unhappy with the proposed transaction/client

Depending on when you identify that there is an issue, you have a variety of options:

• You are not satisfied as to ID/the basis of the transaction/the client at a very early stage. You are not obliged to take on any particular client or piece of business, and if they cannot satisfy you as to the nature of the business and their identity you should decline to act.
• You realise something is not right during the course of the transaction. In terms of the regulations you should raise your concern in writing (including email) with your money laundering reporting officer (MLRO). This effectively passes responsibility for reporting to your MLRO and it is their responsibility to make a decision on whether to report and how you are to proceed. If you are the MLRO, or you unsure how to proceed, feel free to call the Professional Practice Department (0131 476 8124).
• The problem arises at the last possible moment. This situation is often engineered by professional money launderers. Do not put yourself or your firm in jeopardy out of misplaced loyalty to the client. If a transaction fails to settle on schedule despite heavy contractual penalties, that is likely to be due to failure on the client's part to comply with money laundering regulations. Even if it leads to a complaint/claim, that is preferable to an accusation of criminal conduct on your part.

Preventative measures

Training

Properly trained staff are a legal requirement under the directive, but they are also your first line of defence. They could identify problems at a very early stage.

Procedures

Robust procedures, which cannot readily be overwritten by anyone (including partners), are a significant protection. Even if your firm is unfortunate enough to be the victim of a money laundering fraud, the fact that you have robust procedures in place is a significant defence to a suggestion that you were actively involved.

Terms of business

Robust clauses in terms of business letters relating to money laundering are strongly recommended. Such clauses limit the amount of cash that can be paid through the firm, highlight that transactions can be disrupted/delayed by failure to provide ID/source of funds, etc. Where a transaction has been refused consent by SOCA, it is not tipping off to remind the client of your terms of business where you warned them of the consequences of their actions.
Most solicitors have ample work, but even if you do not, you should turn away questionable business. If in doubt, err on the side of caution.

Morag Newton is Director, Guarantee Fund, and James Ness is Deputy Director, Professional Practice at the Law Society of Scotland