How to avoid that Guarantee Fund interview, and worse...

Many solicitors are still finding that a routine inspection, which they were confident would only reveal a few book-keeping or other minor administrative corrections, suddenly turns into a personal and professional nightmare.

The latest version of the Money Laundering Regulations dates from December 2007, and there are important additional duties from 1 November 2011. It may be helpful to understand the approach of our regulators, the Law Society of Scotland.

1. The basic documentation

The requirement is to have a certificate in all cases, and for all files. That must be in a form that shows who did the ID check, the means by which it was done, and the date on which it was done. That certificate has to be kept for five years after the conclusion of the work.

2. Where to keep it

There is a logistical problem in deciding whether that certificate should be on the client file, in a central file, or both. If the file is lost or mandated away, the only available evidence of compliance may go with it. If the regulator asks for proof of compliance, e.g. at a routine inspection, or on a problem or client complaint developing, it is not desirable to have to embark on an urgent file search. Depending on the firm’s case management system, a central ID record for at least all medium to high-risk cases, as described below, is best, possibly copied to the client file.

3. Assessment of risk levels

One feature of the post-2007 system is that different levels of scrutiny are required for different types of case. That will immediately create a problem if you haven’t bothered to assimilate what is needed. In some ways, there are advantages in the new approach, for low-risk cases. If you have routine instructions that don’t really need advanced money laundering procedures (e.g. a stream of reparation cases from a trade union, or in legal advice or legal aid cases), you are entitled to do a shortened or simplified certificate.

You can devise something for your own practice, so that not every case has to have the full rigmarole of copy passports, utility bills etc. That could be a two-line “Adequate ID from incoming papers, which include d.o.b., NI no, employment/medical history etc”. That might seem rather minimalist, but the regulator, having seen that in a low-risk type of case a professional judgment has been exercised in compliance with the regulations, will not usually try to second-guess that judgment, or tell solicitors how to run their business, where personation or fraud seems highly improbable.

4. Delegated ID

You cannot rely on ID by others, except in quite limited circumstances. For example, where the client is some distance away, the regulations allow for that to be done by another regulated legal professional, provided they know, and have acknowledged, that you will be relying on their ID measures, and not doing your own. A photostat from an IFA, or other dealer or agent will definitely not do, and will bring the regulator’s scrutiny down on your firm.

5. Don’t leave out your staff

All staff have to be made aware of these regulations, which have to observed strictly and quite independently of the other checks that you have to do on the source of money. You must be able to show both initial instruction of staff, and reasonably regular updating of their training.

6. Monitoring

An adequate office system therefore requires identification at the outset of the risk level for each particular transaction, and monitoring by regular review. A deal may settle down and become wholly non-controversial, or it may develop the other way. The solicitor is expected to be able to demonstrate a full professional awareness from first to last of what might be going on.

The regulator will expect to see evidence of proactive monitoring of risk, such as a file review, say, every month by the MLRO on a spot-check basis (e.g. every tenth file), and a file note or record on a separate monitoring of risk document, of any development in the transaction, and the decision taken and why. That sheet can helpfully be left on the file, except where a SOCA report has gone in – the record of that has to be confidentially kept to avoid a charge of tipping off. The regulator will accordingly expect to see evidence of both proactive and reactive monitoring, e.g. by recording what action was taken, on detecting particularly any of the features listed in [7] below.

7. The usual suspects

See panel below.

8. The CML conditions

Always bear in mind, and get familiar with, the CML conditions, or the particular version attached to your loan instructions. All the variations in section [7] are bound to be reported to the lender, and that is best done as soon as the information is received. If you leave it until the time of reporting on title and drawing down funds, you are unlikely to get the all clear in time to meet the proposed settlement date, if at all.

It is not enough that a loan on the “top line” price is backed by a valuation from a reputable firm. LDU experience is that a surprising number of solicitors have been willing to draw down funds in breach of half a dozen CML requirements, by not disclosing a prior transaction within six months, or a relationship pre-existing between buyer and seller, or a discount more than 5%, or part of the price passing direct, or a recent transaction reflecting on value.

Most importantly (remembering that the lender is also your client), anything that a reputable solicitor would think their client should know should be reported, whether spelt out in the rules or not. Apart from the liability under civil law for breach of the warranties in the loan conditions, it is misconduct to mislead your client. The SSDT, on a 1989 prosecution over a disguised discount, also adverted to the impact on the public registers of solicitors feeding in what is essentially bogus information about the true price, thereby skewing the information upon which statisticians and all sorts of other people rely for assessing the economic reality of the property market.

Silence is not consent. Also, bear in mind that if you pick up something needing a report to the lender when monitoring a transaction, you may encounter silence or only a neutral acknowledgment from the lender. Reminder phone calls may only lead you into a call centre maze, but the CML conditions are quite specific to the effect that you still do not have authority to use the loan funds. That can cause havoc with entry imminent, but the decision to act and use the funds will only bring the whole problem down on your head, instead of where it belongs which is somewhere between the client and the agent, dealer or broker who put in that loan application with which you were never involved.

The answer is to insist on being in charge and informed throughout. When in doubt, act early and use the Society and LDU helplines.

Think about your future. Be aware that the way such transactions are likely to unfold, will be in a failure to keep up the loan repayments on what may well have been a scheme to create a large and quick cash dropdown. On a calling-up notice, repossession and resale, the inevitable shortfall will be claimed from you and/or the Master Policy or Guarantee Fund. If you have been blind (negligently or wilfully) to the fact that the whole thing was a fraud designed to get the lender to advance far more than was actually necessary to buy the property, you may well find yourself in breach of the Master Policy, and uncovered, so that the insolvency courts await, to provide a miserable end to your career.

 

What sets off the alarm bells...

Commonly found features which the Society will say should raise alertness, if not suspicion, are:

• A single source stream of similar business e.g. from a debt distress website, or introduced by a local entrepreneur, fixer, or “gombeen man”.
• Discounted or back-to-back transactions, or any transaction where there has been agreement on price other than finding a true market value through the familiar sequence of marketing, closing date, competitive offers leading to missives, etc. This can be described as “the already engaged couple” syndrome, i.e. any situation where the transacting parties come to you with a done deal, with an apparently inappropriate advantage to one or other, or to the intermediary, that would not appear in an arms-length contract.
• Unusual flexibility, such as sudden change or substitution of a borrower or buyer under missives, suggesting the individual is a stooge for the mastermind who is making the vast profit.
• Any instructions about funds which are not moving in the normal way – that means, when purchasing property, anything other than the traditional large loan from mortgage lender, and small deposit from buyer’s own funds. Any suggestion that a substantial deposit is already paid, and will therefore not be coming through your hands, should be viewed most sceptically – even if shown in a state for settlement from a supposedly blue chip firm. If there is a batch of high-tariff buy and sells, are you supposed to believe that the intermediary buying (say) 10 properties for £150,000 each net, funded by an expensive commercial loan limited to £1.5 million, has already, somehow, funded 10 x £70,000 payments to account against a top line price of £240,000 each, upon which borrowing will ensue?
• Think when paying out. The regulator will check on how the funds went out at completion, not just how they came in. Any payment to a third party, outside the obvious and normal, should cause you to think. Consider putting in your terms of business that you will not pay to anyone other than the client. It is obvious from these cases that the selling solicitor’s health and happiness is on the line too, not just the buyer’s agent who has to think about CML conditions. Why would any bona fide house-seller want to give most or all of the free proceeds to someone else? How can you say you are looking after the selling clients where a huge chunk of their very scarce equity is going to a fixer who has done nothing for them?
• That “clear” title. Think about the supposedly clear title, when selling. Why not in effect “moneylaunder”, i.e. check the history of what you are selling in the same way you would check the cash to buy? How did the client, perhaps quite young, come to own an unburdened property worth several hundred thousand pounds? Insist on checking out, and vouching, any story received. For example: client produces deeds with clear title and you sell. Searches show security discharged some time before. However, after you pay out it is revealed, on a plaintive enquiry from a lender, that a forged discharge went on to the record while the scamster continued to pay the monthly instalments. Or the sale of a title shown clear in the searches, but the day your cheque to the client for the sale proceeds is cashed, and while your purchasing colleague is still awaiting the SDLT form to register the deeds, another solicitor belatedly sticks a standard security on the register, for a loan originally drawn down to buy the property you have just sold. These things have happened.
• Stay aware, for really anything at all that would cause a sceptical solicitor to think again – the permutations are infinite.