At least £57 billion is laundered through the UK each and every year. It’s not just criminals turning their illicit money from crime clean. Terrorist financing is often overlooked when it comes to anti-money laundering efforts, but acts of terror in the UK and around the world are being bankrolled in the same way as money is laundered.
Law firms, as well as other professional services such as accountants, estate agents and financial services, are at high risk of being patsies for criminals and terrorists. Because their accounts are seen as “clean,” sending dirty money into a law firm’s client account and having it sent back out again is a sure fire way to launder dirty cash.
How does money laundering happen?
Money laundering most often happens due to human error. Someone is too trusting, can’t spot the red flags, or the firm has inadequate controls in place to prevent it. The role of a law firm in financial crime of this nature is that of “professional enabler,” giving legitimacy suspicious transactions.
The firm’s actions can go from innocent to complicit in the crime, depending on how the criminals abuse the firm and the procedures that are in place to prevent it.
Now with the Money Laundering Regulations 2017 in place, there is a duty to conduct thorough risk assessments on new business, conduct ongoing monitoring of long term clients and actively train staff to prevent money laundering from taking place.
How does it work?
The FATF has identified some specific types of work which are attractive to money launderers:
- Abuse of the client account
- Property purchases
- Creation and management of companies and trusts
- Managing client affairs and making introductions
Certain weak points in a firm’s procedures can also open vulnerabilities for criminals to exploit. These include:
- Failure to conduct client due diligence – not properly checking identity documents, failing to undertake enhanced due diligence or properly checking an individual’s background.
- Failure to trace source of funds or beneficial owner – not requesting documentary evidence, failing to following up on suspicions about an individual or transaction, and not properly investigating the client and their connections.
- Infiltrating the firm – in recent years, criminals have directly tried to infiltrate law firms by impersonating staff members, falsifying credentials and targeting solicitors in the firm.
Fraudsters may aim to launder dirty money by swapping it for clean money through a law firm’s office account. Here are two common examples:
A criminal overpays the firm’s fees in advance with a fraudulent or stolen cheque and asks for the balance to be returned before the cheque has cleared.
A criminal team works together to trick the law firm with this popular scheme: A ‘debtor’ owes money to a ‘business’. The ‘business’ hires a lawyer to get the ‘debtor’ to pay the debt. The ‘debtor’ pays the law firm with a fraudulent or stolen cheque. Then the ‘business’ asks the firm to pay the funds to them before the cheque has cleared.
It may seem surprising that any firm would ever pay out against an uncleared cheque, especially after the Law Society specifically warned about this. However, the National Crime Agency (NCA) is continuing to get reports of fraudsters attempting this methodology and have had a few firms asking for assistance to recover the funds they have paid away.
Convictions against solicitors for money laundering are on the rise. Firms need to ensure their staff are well trained on spotting red flags and understanding money laundering legislation, implementing strong controls and conducting proper risk assessments according to best practice.