Money laundering and anti-money laundering regulations - Obligations under the Money Laundering Regulations

Learning Outcomes

After reading this article, you will be able to explain the main obligations imposed by the Money Laundering Regulations on solicitors and law firms. You will understand the requirements for risk assessment, client due diligence (CDD), ongoing monitoring, reporting suspicious activity, and recordkeeping. You will also be able to identify when enhanced or simplified due diligence is required, and the consequences of failing to comply with reporting or confidentiality rules. This knowledge is essential for SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the legal and practical requirements of anti-money laundering compliance. Focus your revision on:

• the purpose and scope of the Money Laundering Regulations and their application to legal services
• the obligations to conduct risk assessments and implement internal controls
• the requirements for standard, enhanced, and simplified client due diligence (CDD)
• ongoing monitoring of client relationships and transactions
• the duty to report suspicious activity and the procedures for making disclosures
• the offence of tipping off and the importance of confidentiality
• recordkeeping and staff training requirements under the Regulations

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main purpose of the Money Laundering Regulations for solicitors?
2. When must a solicitor apply enhanced due diligence measures?
3. What is a Suspicious Activity Report (SAR), and when must it be submitted?
4. What is the offence of 'tipping off' in the context of anti-money laundering law?

Introduction

Money laundering is the process by which criminals disguise the origin of funds obtained from crime, making them appear legitimate. Solicitors and law firms are at risk of being used to facilitate money laundering, especially when handling client money or property transactions. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "Money Laundering Regulations") impose strict obligations on legal professionals to prevent, detect, and report money laundering and terrorist financing.

Key Term: money laundering
Money laundering is the process of concealing the criminal origin of money or assets to make them appear legitimate.

The Legal Framework

The Money Laundering Regulations apply to "relevant persons," including independent legal professionals, when they participate in certain financial or property transactions. These rules are supported by the Proceeds of Crime Act 2002 (POCA), which defines money laundering offences and reporting duties.

Key Term: criminal property
Criminal property is any property that represents a benefit from criminal conduct, directly or indirectly, and includes money, assets, or rights.

Risk Assessment and Internal Controls

Firms must identify and assess the risk of being used for money laundering or terrorist financing. This involves a written, firm-wide risk assessment, considering the nature of clients, services, transactions, delivery channels, and geographic factors. The assessment must be reviewed regularly and updated as risks change.

Firms must also establish and maintain written policies, controls, and procedures to manage and mitigate identified risks. These must be proportionate to the size and nature of the firm and approved by senior management.

Key Term: risk-based approach
A risk-based approach means tailoring anti-money laundering measures to the level and type of risk present in the firm’s activities.

Client Due Diligence (CDD)

Solicitors must carry out CDD before establishing a business relationship or carrying out certain transactions. CDD involves:

• identifying and verifying the client’s identity using reliable, independent sources
• identifying and verifying any beneficial owner (for example, someone who owns or controls more than 25% of a company or partnership)
• understanding the purpose and intended nature of the business relationship

CDD must be completed:

• before establishing a business relationship
• when carrying out an occasional transaction of €15,000 or more
• when there is suspicion of money laundering or terrorist financing
• when there are doubts about previously obtained client identification

Key Term: client due diligence (CDD)
CDD is the process of identifying and verifying the identity of clients and beneficial owners, and assessing the purpose of the business relationship.

Standard, Simplified, and Enhanced Due Diligence

Standard due diligence applies in most cases. Solicitors must obtain and verify the client’s identity and, for companies or trusts, the beneficial owners.

Simplified due diligence may be applied where the risk of money laundering is low, such as when dealing with UK public authorities or listed companies. However, firms must still monitor for suspicious activity.

Key Term: simplified due diligence
Simplified due diligence is a reduced level of CDD permitted where the risk of money laundering is low.

Key Term: enhanced due diligence
Enhanced due diligence (EDD) is a higher level of CDD required in higher-risk situations, such as dealing with politically exposed persons (PEPs) or clients from high-risk countries.

EDD must be applied when:

• the client or transaction is high risk (e.g., complex or unusually large transactions)
• the client is a politically exposed person (PEP), or a family member or close associate of a PEP
• the client is established in a high-risk third country
• the client has provided false or stolen identification, or the business relationship is not conducted face-to-face

EDD involves obtaining additional information, verifying the source of funds and wealth, and increased ongoing monitoring.

Worked Example 1.1

A solicitor is instructed to purchase a property for a new client based in a country identified as high risk for money laundering. The client is a senior government official.

Question: What due diligence measures must the solicitor apply?

Answer: The solicitor must apply enhanced due diligence, including verifying the client’s identity, establishing the source of funds and wealth, obtaining senior management approval to proceed, and conducting ongoing monitoring of the relationship.

Ongoing Monitoring

Firms must monitor business relationships on an ongoing basis to ensure transactions are consistent with the solicitor’s knowledge of the client and to identify any unusual or suspicious activity. If a client’s risk profile changes, the firm must update its CDD.

Reporting Suspicious Activity

If a solicitor knows or suspects, or has reasonable grounds to suspect, that a person is engaged in money laundering or terrorist financing, they must make a disclosure (Suspicious Activity Report, or SAR) to the firm’s nominated officer (often called the Money Laundering Reporting Officer, or MLRO). The nominated officer must then consider whether to report the matter to the National Crime Agency (NCA).

Key Term: Suspicious Activity Report (SAR)
A SAR is a report made to the nominated officer or NCA when there is knowledge or suspicion of money laundering or terrorist financing.

Worked Example 1.2

A client asks a solicitor to return £100,000 previously deposited for a transaction that has fallen through, but requests that the funds be split and sent to several overseas accounts. The solicitor is suspicious.

Question: What should the solicitor do?

Answer: The solicitor must make a disclosure to the firm’s nominated officer. If the nominated officer decides to submit a SAR to the NCA, the solicitor must not proceed with the transaction until authorised to do so.

Tipping Off and Confidentiality

It is a criminal offence to disclose to a client or third party that a SAR has been made or that a money laundering investigation is underway, if that disclosure is likely to prejudice the investigation. This is known as "tipping off".

Key Term: tipping off
Tipping off is the offence of informing a person that a SAR has been made or that an investigation is ongoing, where this may prejudice the investigation.

Key Term: nominated officer (MLRO)
The nominated officer (or MLRO) is the person appointed by a firm to receive internal reports of suspicious activity and make external disclosures to the NCA.

Exam Warning

Disclosing to a client that you have made a SAR, or that their matter is under investigation, is a criminal offence. Always maintain strict confidentiality after making a disclosure.

Recordkeeping and Training

Firms must keep records of CDD, ongoing monitoring, risk assessments, and all transactions for at least five years from the end of the business relationship or transaction. Firms must also provide regular anti-money laundering training to relevant employees and keep records of training delivered.

Key Term: recordkeeping
Recordkeeping is the requirement to retain documents and information relating to CDD, transactions, and training for a specified period.

Penalties for Non-Compliance

Failure to comply with the Money Laundering Regulations, including inadequate CDD, failing to report suspicious activity, or tipping off, can result in criminal prosecution, fines, and regulatory sanctions.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The Money Laundering Regulations impose strict obligations on solicitors and law firms to prevent money laundering and terrorist financing.
• Firms must conduct written risk assessments and implement proportionate internal controls.
• Client due diligence (CDD) is required before establishing a business relationship or carrying out certain transactions.
• Enhanced due diligence (EDD) is mandatory in high-risk situations, such as dealing with PEPs or high-risk countries.
• Suspicious Activity Reports (SARs) must be made to the nominated officer and, if appropriate, to the NCA.
• Tipping off is a criminal offence—never disclose a SAR or investigation to a client.
• Firms must keep records of CDD, transactions, and training for at least five years.
• Regular staff training on anti-money laundering is required.

Key Terms and Concepts

• money laundering
• criminal property
• risk-based approach
• client due diligence (CDD)
• simplified due diligence
• enhanced due diligence
• Suspicious Activity Report (SAR)
• tipping off
• nominated officer (MLRO)
• recordkeeping