Keeping money clean

Major new money laundering regulations came into force in Scotland this month – and solicitors must take action to ensure they do not fall foul of the rules. The Money Laundering Regulations 2007, which became active on 15 December, implement the EU Third Money Laundering Directive throughout the UK.

The aim of the regulations is to deter, detect and disrupt money laundering and the financing of terrorism. The new system moves away from the former “tick box” approach, to a risk based and proportionate one, which takes a broader view of the client and the transaction.

One of the major issues will revolve around the definition of “beneficial ownership”, which requires account to be taken of who is behind the transaction as well as who is instructing the solicitor. This will involve examining a number of factors, such as the purpose and nature of the transaction, particularly if it seems unnecessarily complicated; and the involvement of third parties as directors or shareholders, and related, perhaps offshore, companies or family trusts. Ongoing monitoring of the business relationship will also be required, and documentation and data must be kept up to date. Non-compliance carries criminal sanctions.

Also, responsibility will shift from the sole concern of the money laundering reporting officer, to full corporate responsibility involving all the principals in the firm and potentially all members of staff. Assessing risk requires skill, training and judgment, which is likely to lead to more senior and experienced solicitors taking responsibility for money laundering issues to minimise risk. Most solicitors instinctively know when something is wrong, but the need for vigilance will become ever more apparent as the regulations bed in.

With that in mind, the Society’s Deputy Director of Professional Practice, James Ness, offers some advice for firms (see panel). He says: “Under the new regime, the tick box system is no longer enough. For instance, when checking a prospective client’s identity, it will no longer be sufficient for him or her simply to produce a passport or utility bill. If anything about the client, the transaction or the source of funds causes any concerns about money laundering, the solicitor will have to do a lot more digging around (‘enhanced due diligence’, in the language of the regulations) to establish who the client is and who else, if anyone, is behind the transaction, as well as clarify any issues with source of funds.

“There are a number of things solicitors can do to ensure they do not fall foul of the regulations, including simple precautions such as reviewing money laundering systems and process at least twice a year and making appropriate changes where necessary. Even if a firm is unfortunate enough to be the victim of a money laundering fraud, the fact that robust procedures are in place is a significant defence to a suggestion that solicitors were actively involved.

“Solicitors should also be aware that they are not obliged to take on a piece of business, and should not do so if they have money laundering concerns. Anyone who does have concerns can always contact the Professional Practice Team at the Society and we will do all we can to help and advise.”

In early December, the Society staged four Money Laundering Roadshows, in Edinburgh, Aberdeen, Glasgow and Inverness, specifically to highlight the impact of the regulations, with further information provided at six ARTL events. A money laundering DVD is also being produced and faculty visits can also be organised, if required.

Morag Newton, the Society’s Guarantee Fund Director, will also be available to offer advice to members of the profession where it relates to her department. She says: “We want to work with the profession, to offer advice and guidance. But we also need them to feed back to us where there are specific issues so that we can keep everyone up to date with developments.

“Those who had a good system in place before these latest regulations will be well placed to deal with the changes. We want to keep all solicitors safe because some criminals will find a way past procedures and the police will turn up at the door. Our robust inspection process will help to avoid that happening by giving firms the opportunity to put matters right.”

For further information on money laundering, contact the Society or visit www.lawscot.org.uk/Members_Information/moneylaundering .

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MONEY LAUNDERING TOP TIPS

Produce a money laundering policy document. Firms must already have an internal manual on money laundering.

That must be updated to build in the requirements of the new risk assessment-based system.

Document procedures. Properly trained staff are a legal requirement under the directive, but they are also a firm’s first line of defence. They could identify problems at a very early stage. The Society advises training staff at least twice a year. This could include making use of the anti-money laundering DVD that is being produced by the Society. All training must be properly documented.

An annual report should be produced on all issues related to money laundering. As indicated above, this would likely include what training has been carried out; the number and nature of money laundering incidents and the procedures followed in reporting matters to the money laundering reporting officer (MLRO); reports to the Serious Organised Crime Agency; and the issue of any warrants under proceeds of crime legislation seeking production of any files in possession of the firm.

A compliance audit of internal procedures should be carried out on a regular basis and properly documented.

Appoint, or reappoint, an MLRO. Under the new regulations, there will be full corporate responsibility for money laundering incidents, so it is important to appoint a senior, experienced solicitor to this important position and to empower them and support them in fulfilling the firm’s responsibilities.

Change “new client form”. This is a good example of the shift from a tick box system to one based on more thorough risk assessment, for instance when checking the identity of a prospective client. It may be useful to use a scoring system when assessing the risk associated with a client or transaction. If the score indicates serious levels of concern, the matter should be passed to the MLRO. The Society intends to publish a “risk matrix” to assist member firms with this assessment.

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 a client that the terms of business warned them of the consequences of their actions. Most solicitors have ample work, but even those who do not should err on the side of caution and turn away questionable business.