Chinese underground banking – Money laundering risks, and potential exploitation of legal services by organised crime Supervisory advice note and associated webinar

We recently published an updated Scottish sectoral AML risk assessment, which included information on clients and business matters with links to higher risk jurisdictions.  It is vital to ensure there continues to be close scrutiny of sources of funds and potential exploitation of legal services by organised crime and in the assessment, we stated our view that the inherent money-laundering risks associated with Chinese individual direct investment activity, capital flight and high value goods trading are significant in the Scottish legal sectoral context.

To be clear, the issue is not with the vast majority of Chinese clients whose legal interests are entirely legitimate, but with a particular type of transaction with specific characteristics which have been most prevalent across a small minority of Chinese clients. That said, this is a significant and growing threat - all solicitors, no matter what the size, nature or location of their practice, should remain vigilant. Where one suspect client goes and the door opens, others follow, particularly across a defined money laundering typology.
We continue to review transactions where funds received from China, or from sources with a nexus or other links to China, follow unusual or questionable transactional patterns or have not otherwise been reasonably accounted for.

In the last couple of years, several of our inspections have uncovered activity which has been highly suspect with hallmarks of money laundering activity. Activity has been found across a range of practices, but generally in smaller practices, located in urban areas through the central belt of Scotland. This is not to say it is not happening elsewhere, and in towns and cities with smaller populations.

Furthermore, these firms aren’t necessarily those which have established links to the Chinese community or with established links, but rather, those who passively or actively have attracted Chinese clients as a source of revenue.

We are also seeing increased suspect activity of this type across firms who have only begun to take on conveyancing work during or post pandemic or to alleviate possible financial stress. These firms may not have the appropriate AML controls in place to mitigate risk, including adequate training or knowledge, risk assessment Customer Due Diligence (CDD) controls or critically, source of funds checking in accordance with Legal Sector Affinity Group (LSAG) guidance.

Therefore, if you are suddenly seeing a marked increase in the number of Chinese clients approaching your firm, and the transactions follow a similar pattern in terms of source of funds/wealth – we would certainly advise employing thorough customer due diligence checks and close scrutiny of source of funds.

AML webinar

For further advice on how to spot the warning signs and information on your AML obligations watch this webinar featuring our Head of Anti-Money Laundering Graham Mackenzie and other experts from the National Crime Agency, the Law Society of England and Wales and the Solicitors Regulation Authority.