Financial crime risks for law firms
The Financial Action Task Force (FATF) is due to conduct its next mutual evaluation of the United Kingdom in the spring of 2016 to assess the levels of implementation of the FATF Recommendations1.
In advance of this, in September 2014 the Solicitors Regulation Authority (SRA) began a thematic review focusing on anti-money laundering (AML) and counter-terrorist financing (CFT) compliance by solicitors. It is expected to report its findings in May 2015. The review has also been prompted by a drop in the number of Suspicious Activity Reports (SARs) filed with the UK National Crime Agency. The SRA’s actions follow close scrutiny of financial services firms by the UK Financial Conduct Authority (and its predecessor, the Financial Services Authority), which has highlighted a range of deficiencies in relation to AML and CFT controls.
For some law firms, AML and CFT compliance is proving a particular challenge. Last month Sam Palmer, a senior manager of regulatory management at the SRA, is reported to have commented that some “genuinely shocking” cases of money laundering at law firms are already going through the disciplinary system 2.
As both the SRA and FATF have identified, it is regrettably the case that unscrupulous individuals will want to associate themselves with credible and respected advisers such as law firms, thereby leveraging their brand and reputation. This in turn makes it easier for these individuals to gain acceptance from other professional advisers and third parties they may be seeking to do business with.
What are the warning signs?
There are a number of more obvious warning signs that require further attention. These include:
- If the prospective client is a Politically Exposed Person (PEP) – a number of commercially-available databases exist to check whether an individual is a PEP. Alternatively the CIA Heads of State index3 or national government websites – such as lists of members of parliament – also provide certain details. Bear in mind that no one source covers all PEPs and it may be necessary to conduct additional investigations in certain circumstances to identify PEP status (or to establish whether the prospective client is a close associate of a PEP)
- Whether the prospective client is subject to economic sanctions: consider at least the HM Treasury economic sanctions list, but also, as necessary, applicable sanctions imposed by the US Treasury Office of Foreign Assets Control (OFAC), the United Nations or other national governments
- If the prospective client is domiciled in a country with a higher risk of bribery and corruption – sources such as Transparency International’s Corruption Perceptions Index4 (which was updated in December 2014) can be used evaluate relative levels of bribery and corruption risk
- Additionally, you may wish to consider whether the prospective client is transferring funds from a territory that has an elevated level of money laundering or terrorist financing risk5
- If the matter involves a complex or high-value transaction
In our experience there are also a number of further risk indicators that may require more specific and iterative investigation:
- Basic facts do not agree: dates of birth may be inconsistent such as between corporate filings and client-provided details; addresses may not match, or may relate to P.O. boxes or non-residential addresses
- The prospective client makes claims about their career or interests that are difficult to validate, are vague or appear inaccurate; similarly, their rationale for wanting to engage with a law firm or for a particular service may not be clear
- There is a lack of clarity over their source of wealth or their source of funds – a key topic currently for the FCA in the UK in relation to wealth management businesses and for regulators more generally
- Claimed business interests that do not stand up to closer scrutiny – for example, ostentatious claims about successful enterprises or business investments that are not factually verifiable, or appear to be significantly exaggerated
- Use of complex corporate structures that are not supported by any clear commercial rationale – more than two to three layers of corporate ownership
might be considered unusual and worthy of further investigation
- Sham litigation is an ever-present risk to be alert to. In a recently-reported case, suspected money launderers allegedly used a combination of UK companies and sham litigation in Moldova to launder $20bn6
What are the implications of not vetting prospective clients adequately?
The SRA has reiterated guidance on the obligations of law firms under the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Money Laundering Regulations 2007. The recent experience of financial institutions also demonstrates how adverse findings can impact an organisation’s reputation. Of further concern is that individuals committing money laundering or terrorist financing activities may be involved in perpetrating fraud, potentially giving rise to commercial risks over non-payment of fees.
At Aperio Intelligence, we are dedicated to helping our clients to uncover relevant facts about the background and reputation of their prospective customers, helping them to mitigate the risks associated with money laundering and terrorist financing. To have an informal conversation in confidence about how we can help, please contact:
+44 (0)20 7073 0430
Senior Client Partner
+44 (0)20 7073 0430