For the majority of small sized legal firms, money laundering may seem like an issue confined to the headlines of newspapers. However, the reality is that small firms are just as much at risk of becoming involved in money laundering as their larger counterparts.
Helping to raise awareness amongst these small firms, that they too are a target for illegal organisations – looking to facilitate their crimes and clean up their money – is imperative. In fact, legal firms both large and small have an important role to play in ensuring they are equipped with the tools to protect themselves from this threat.
The devil’s in the detail
Sticking to a proper risk-based due diligence process is central to tackling the threat of money laundering. If something seems overly secretive or complex to you, or just doesn’t make commercial sense then it is probably worth investigating further.
It’s important to stop and consider some of the red flags of money laundering, such as:
- Inconsistencies in the information provided
- Complex group structures that are not fully explained or which obscure the beneficial ownership of assets
- Transactions that make no sense in the business context
- Evasive clients who fail to offer a plausible explanation
Many practitioners believe thorough checks into clients are only necessary for new or potential clients, when in fact existing and long-held clients can be just as much of a risk. Integrating regular due diligence checks to make it a routine practice is the most effective way to safeguard against the risk.
Clients and their situations can change, so it is particularly important to reinstitute due diligence activities after certain triggers, such as a change in directorship or expansion in the business.
Make it personal
Criminal enterprises looking to disguise themselves as a legitimate business may also look to capitalise on technology that prevents them from meeting their solicitor in person. Technology can act as a convenient disguise for organisations trying to cloak themselves in legitimacy. Therefore, if your client is reluctant to meet in person, or for you to come to their offices, it is important to ask yourself why.
Smaller legal and accountancy firms can enjoy the privilege of a more personable relationship with their clients not afforded to larger firms. Make a concerted effort to understand your client on a commercial level, such as their business strategy or the industry they operate in. This will help you establish a keen eye for any activity that doesn’t make business sense.
Proactively asking your clients questions about their business is important too. Major business developments such as a change in directorship can easily go unnoticed by a lawyer, so ensure that you are regularly seeking information about changes to the company that could prompt a review of their risk and trigger due diligence procedures.
The most sophisticated criminal organisations can seem legitimate. It is only through undertaking thorough due diligence and remaining vigilant to suspicious activity that potential money laundering schemes can be uncovered. This is even more imperative within smaller firms where dedicated compliance teams are not always present or there are fewer resources committed to tackling it.
The consequences of being tangled up in money laundering, even inadvertently, are serious. They come in terms of damage to reputation, to the cost of insurance and also penalties from the Solicitors Disciplinary Tribunal (SDT), possibly resulting in suspension or being struck off. And because the activity is illegal, there could be sanctions including prison sentences.
Precautionary measures should be taken right across the firm, including working with young associates who might be especially keen to be seen to be bringing in business. Everyone needs to be part of the anti-money laundering culture, otherwise the system is much more likely to fail.
Regardless of whether a firm’s involvement in money laundering is intentional or accidental, the consequences can be severe to both you as a practitioner and to your business. Take the example of one former sole practitioner, based in Norfolk, who became unwittingly involved in money laundering and was suspended by the SDT in 2016.
He had become involved in transactions that should have raised significant red flags, including the transfer of 400,000 euros from one unknown individual to another in Russia, and the tribunal found that he had ‘completely failed to carry out money laundering checks or prevent his client’s bank accounts from being misused’.
Although the solicitor had a previously unblemished record, and a number of glowing references from clients, this did not prevent his suspension and the related damage to his professional reputation. One slip up cost him his career, and other small practitioners would do well to take note of the importance of spotting red flags and taking the appropriate precautions.
What to do…
Small practitioners have a professional, ethical and legal duty to report suspicious activity. If you come across red flags that cannot be explained, consider filing a report with your MLRO and submitting a Suspicious Activity Report (SAR) with the NCA.
The SAR process is confidential, and a legal requirement as stated by the Proceeds of Crime Act 2002, when faced with suspicious behaviour by your client. The intelligence provided is vital to enabling law enforcement to investigate and disrupt serious and organised crime.
By helping to build this intelligence picture, lawyers can protect themselves, their businesses and the legitimate economy from the threat posed by criminal organisations who would exploit them.
Crispin Passmore is executive director at Solicitors Regulation Authority.