Money laundering and anti-money laundering regulations - Pur...

Learning Outcomes

This article outlines the purpose and scope of anti-money laundering legislation for solicitors, including:

• Purpose of AML laws and protection of the financial system and the administration of justice
• UK risk-based regulatory framework (MLR 2017), application of CDD, EDD and ongoing monitoring by solicitors, and incorporation of internal policies, controls and training
• Scope of AML obligations in solicitors’ work, reporting of suspicions under POCA, and defences and risks (including tipping off and moratorium timing)
• International standards (FATF), UK financial sanctions overseen by OFSI, and incorporation of sanctions screening into day-to-day practice

SQE1 Syllabus

For SQE1, you are required to understand the purpose and scope of anti-money laundering legislation, including the international context and application to solicitors, with a focus on the following syllabus points:

• the objectives and rationale behind anti-money laundering laws
• the main features and requirements of UK AML legislation (including the Proceeds of Crime Act 2002 and Money Laundering Regulations 2017)
• the international standards set by bodies such as the Financial Action Task Force (FATF)
• the application of AML rules to solicitors and law firms, including due diligence, reporting, and record-keeping obligations
• the importance of international cooperation in preventing and detecting money laundering
• offences under POCA (ss 327–329 direct involvement; s 330 failure to disclose; s 331 nominated officers; s 333A tipping off; s 342 prejudicing an investigation)
• the MLRO/nominated officer role, internal reporting, consent/moratorium timing
• risk assessment (reg 18), written policies, controls and training (regs 19, 21, 24), record‑keeping (reg 40)
• UK financial sanctions oversight by OFSI and the obligation to report and license fees for designated persons
• the Criminal Finances Act 2017 corporate offence of failure to prevent the criminal facilitation of tax evasion

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 are the main objectives of anti-money laundering legislation?
2. Name two international bodies or standards that influence UK AML law.
3. When must a solicitor apply enhanced due diligence measures?
4. What is the purpose of a suspicious activity report (SAR) and to whom is it submitted?
5. True or false? AML obligations only apply to banks and not to solicitors.

Introduction

Money laundering is the process by which criminals disguise the origin of funds obtained through illegal activity, making them appear to come from legitimate sources. Anti-money laundering (AML) legislation is designed to prevent, detect, and disrupt this process. For solicitors, understanding the purpose and scope of AML laws—including their international context—is essential for compliance and for the SQE1 exam.

Key Term: money laundering
The process of concealing the origins of money obtained from criminal activity, making it appear legitimate.

Key Term: anti-money laundering (AML) legislation
Laws and regulations designed to prevent, detect, and report money laundering and related criminal activity.

The Purpose of Anti-Money Laundering Legislation

The main aim of AML legislation is to protect the integrity of the financial system and to prevent criminals from benefiting from their crimes. AML laws are also intended to:

• detect and deter money laundering and terrorist financing
• recover criminal assets by tracing and confiscating illicit funds
• ensure transparency and accountability in financial transactions
• support international efforts to combat organised crime and terrorism
• uphold the rule of law by requiring regulated professionals (including solicitors) to refuse to act in ways that facilitate crime and to report suspicions appropriately

Key Term: risk-based approach
Assessing and managing money laundering risks according to the nature of the client, transaction, and services provided.

Scope of Anti-Money Laundering Legislation

AML laws apply to a wide range of sectors, not just banks. In the UK, solicitors and law firms are subject to AML obligations when they participate in certain activities, such as:

• buying or selling real property or business entities
• managing client money, securities, or other assets
• opening or managing bank, savings or securities accounts
• organising contributions for the creation, operation or management of companies
• creating, operating, or managing trusts, companies, or similar structures

Under the Money Laundering Regulations 2017 (MLR 2017), solicitors are “independent legal professionals” when they participate in those transactions. Litigation work is generally outside the scope of MLR 2017, but POCA offences still apply to all persons, and solicitors must not handle criminal property or ignore reportable suspicions that arise in litigation contexts.

Key Term: regulated sector
Businesses and professions (including solicitors) subject to AML laws due to the risk of being used for money laundering.

Solicitors must ensure their services are not used to facilitate money laundering. This includes applying due diligence, monitoring transactions, and reporting suspicious activity.

International Context and Standards

Money laundering is a global problem. Criminals often move funds across borders to evade detection. International cooperation is therefore essential. The main international body setting AML standards is the Financial Action Task Force (FATF).

Key Term: Financial Action Task Force (FATF)
An inter-governmental body that sets international standards to combat money laundering and terrorist financing.

The FATF issues Recommendations that countries are expected to implement. These include requirements for customer due diligence, record-keeping, reporting suspicious transactions, and international cooperation. Countries are assessed by mutual evaluations; serious or strategic deficiencies can result in “greylisting” or “blacklisting,” which increases financial scrutiny and harms market access.

The European Union historically issued AML Directives implemented by Member States. Post‑Brexit, the UK has retained and updated its AML regime (for example, through the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020) while remaining aligned with FATF standards.

Key Features of UK AML Legislation

The UK’s AML regime is primarily based on the Proceeds of Crime Act 2002 (POCA) and the MLR 2017. The main requirements for solicitors and law firms include:

Risk-Based Approach

Firms must assess the risk of being used for money laundering and tailor their policies, controls, and procedures accordingly.

• firm‑wide risk assessment must be documented and kept up to date (MLR 2017, reg 18)
• address the nature of services, client base, delivery channels (including remote onboarding), and geographic exposure (including high‑risk third countries)
• take account of the SRA’s sectoral Risk Outlook and the Government’s National Risk Assessment (which highlights conveyancing, trust/company services and client account services as higher‑risk areas)

Key Term: risk-based approach
Assessing and managing money laundering risks according to the nature of the client, transaction, and services provided.

Policies, Controls and Procedures; Internal Governance

Firms must have written AML policies proportionate to their size and nature (reg 19), senior management approval, and effective internal controls (reg 21). This includes:

• client acceptance standards, CDD and EDD procedures, sanctions screening, reporting lines, and transaction monitoring
• appointing a Money Laundering Compliance Officer (MLCO) and a nominated officer (usually the MLRO) to receive internal reports and, where appropriate, submit SARs
• approval by the SRA of beneficial owners, officers and managers (reg 26) in firms within scope; acting without approval is a criminal offence

Key Term: Money Laundering Reporting Officer (MLRO)
The person within a firm responsible for receiving internal reports and making external disclosures to the NCA.

Key Term: Money Laundering Compliance Officer (MLCO)
The senior individual responsible for overseeing the firm’s compliance with the MLR, including policies, controls and procedures.

Customer Due Diligence (CDD)

Firms must verify the identity of clients and beneficial owners before establishing a business relationship or carrying out certain transactions (regs 27–28). CDD must be applied:

• when establishing a business relationship
• when carrying out occasional transactions above specified thresholds
• when there is suspicion of money laundering
• when there are doubts about previously obtained client information
• to corporate bodies: confirm legal form, registration number, registered office and principal place of business; identify and verify beneficial owners and control structures (reg 43)

Key Term: customer due diligence (CDD)
The process of identifying and verifying the identity of clients and understanding the nature of the business relationship.

Key Term: beneficial owner
The individual(s) who ultimately own or control a client or the funds involved in a transaction.

Enhanced and Simplified Due Diligence

Enhanced due diligence (EDD) is required in higher-risk situations, such as when dealing with politically exposed persons (PEPs) or clients from high-risk countries. Simplified due diligence may be applied in lower-risk situations, such as dealing with listed companies, subject to a documented risk assessment (reg 37).

Key Term: enhanced due diligence (EDD)
Additional checks and ongoing monitoring required for higher-risk clients or transactions.

Key Term: Politically Exposed Person (PEP)
An individual entrusted with prominent public functions (for example, heads of state, ministers, MPs, senior judges, central bank boards, ambassadors, senior military officers, or senior executives of state‑owned enterprises), including their family members and known close associates.

EDD triggers include (reg 33):

• high-risk third country involvement
• a PEP, a family member or known close associate is a client or beneficial owner (reg 35)
• complex or unusually large transactions, unusual patterns, or transactions with no apparent economic or legal purpose
• non‑face‑to‑face onboarding, or payments from unknown third parties
• false or stolen identity information provided by a client (if you decide to continue dealing)

EDD should examine the background and purpose of the transaction, obtain more detailed ownership/finance information, establish source of funds and source of wealth where appropriate, seek senior management approval to proceed (for PEPs), and apply enhanced ongoing monitoring.

Ongoing Monitoring

Firms must conduct ongoing monitoring of business relationships to ensure transactions remain consistent with the firm’s knowledge of the client and the risk profile (reg 28(11)). This includes keeping CDD information up to date, reviewing unusual activity, and re‑assessing risk.

Reporting Obligations

If a solicitor knows or suspects money laundering, they must submit a suspicious activity report (SAR) internally to the nominated officer/MLRO, who considers whether to report to the National Crime Agency (NCA). Under POCA:

• s 327 (concealing, disguising, converting, transferring or removing criminal property) and s 328 (arrangements) and s 329 (acquisition, use or possession) are direct involvement offences
• s 330 imposes a duty to disclose suspicions by persons in the regulated sector; failure to disclose “as soon as practicable” is an offence
• s 331 imposes an equivalent duty on nominated officers
• consent to proceed (a “DAML”, defence against money laundering) triggers a 7‑working‑day decision period; if refused, there is a further statutory moratorium (usually up to 31 calendar days) that may be extended by court (extensions beyond 31 days can now reach up to 217 days in appropriate cases)

Key Term: suspicious activity report (SAR)
A report made to the authorities when there is knowledge or suspicion of money laundering.

Key Term: tipping off
The offence of informing a client or third party that a SAR has been made or that an investigation is underway, in circumstances likely to prejudice an investigation (POCA s 333A).

Record-Keeping

Firms must keep records of CDD checks, transactions, and internal/external reports for at least five years from the end of the business relationship or the completion of the occasional transaction (reg 40). Records should be sufficient to reconstruct transactions and evidence risk‑based decision‑making.

Internal Controls and Training

Firms must have written policies, appoint a compliance officer, and provide regular AML training to staff (reg 24), including data protection awareness and red‑flag recognition. Training gaps may provide a defence in some failure‑to‑disclose cases under POCA where the employee had not received AML training.

Key Term: regulated sector
Businesses and professions (including solicitors) subject to AML laws due to the risk of being used for money laundering.

Financial Sanctions and AML

UK financial sanctions are distinct from AML but closely related in practice. The Office of Financial Sanctions Implementation (OFSI) oversees compliance with asset‑freezing and other restrictions imposed by the UK (and administers licensing).

• firms must check clients and counterparties against OFSI’s consolidated list of designated persons
• there is a legal obligation to inform OFSI if you know or reasonably suspect that a person is a designated person or has committed sanctions offences
• acting for designated persons may require an OFSI licence to receive reasonable fees for legal advice
• discussing a person’s publicly listed sanctioned status does not amount to tipping off

Key Term: Office of Financial Sanctions Implementation (OFSI)
The UK authority responsible for implementing and enforcing financial sanctions, maintaining the consolidated sanctions list, and administering licences.

International Cooperation

AML laws require countries to work together to prevent criminals from exploiting differences in national laws. This includes sharing information, freezing assets, and extraditing offenders. The FATF monitors countries’ compliance and can place non-compliant countries on a “grey list” or “blacklist,” affecting their ability to do business internationally. The UK participates in cross‑border cooperation (including through the Egmont Group of Financial Intelligence Units) and expects solicitors to consider multi‑jurisdictional risks, especially where funds or structures involve higher‑risk locations.

Worked Example 1.1

Worked Example 1.1

A solicitor is instructed to assist with the purchase of a commercial property. The client is a new company registered overseas, and the funds are to be transferred from several foreign accounts. What steps should the solicitor take to comply with AML obligations?

Answer:
The solicitor should conduct enhanced due diligence, including verifying the identity of the company, its beneficial owners, and the source of funds. The solicitor should assess the risk (including any high‑risk third‑country exposure), obtain information on ownership/control, and senior management approval if a PEP is involved. The solicitor should monitor the transaction and, if there are grounds for suspicion, submit a SAR to the MLRO and await DAML where appropriate.

Worked Example 1.2

Worked Example 1.2

A client asks a solicitor to set up a trust and transfer a large sum from a high-risk jurisdiction. The client is evasive about the source of funds. What should the solicitor do?

Answer:
The solicitor should apply enhanced due diligence, seek further information about source of funds and source of wealth, and consider whether to proceed. If suspicion remains, the solicitor must report the matter to the MLRO and not proceed with the transaction until a DAML is obtained (or the 7‑day decision period lapses without refusal). If consent is refused, the solicitor must observe the moratorium period and avoid any prohibited acts.

Worked Example 1.3

Worked Example 1.3

During conveyancing, a fee earner becomes aware of unusual third‑party payments that are inconsistent with the client’s profile. There is no proof, but the fee earner has reasonable grounds to suspect money laundering. What are the reporting obligations?

Answer:
In the regulated sector, the fee earner must make an internal disclosure to the MLRO “as soon as practicable.” The MLRO then decides whether to submit a SAR to the NCA. Failure by the fee earner to disclose (POCA s 330) can be a criminal offence. The MLRO’s failure to disclose (s 331) is also an offence. The firm should consider whether any immediate transactions are prohibited pending DAML.

Worked Example 1.4

Worked Example 1.4

A client appears on OFSI’s consolidated sanctions list. They ask the firm to advise on a contractual dispute and request payment of fees from a frozen account. Can the firm act?

Answer:
The firm may act, but must inform OFSI of the sanctions match and seek an OFSI licence before receiving fees from frozen funds. The firm must ensure no breach of asset‑freezing restrictions. Screening and reporting do not constitute tipping off because the sanctions list is public. AML due diligence and ongoing monitoring still apply.

Worked Example 1.5

Worked Example 1.5

In litigation, a solicitor suspects that funds offered in settlement may be criminal property. The matter is otherwise outside the MLR 2017. What is the correct approach?

Answer:
Even if litigation is generally outside the MLR, POCA offences still apply. The solicitor should consider whether any act (for example, arranging for criminal property to be transferred) could amount to a prohibited act under ss 327–329 and, if suspicion exists, make an internal report to the MLRO and seek DAML before proceeding. The duty of confidentiality is preserved by statute when disclosures are required/authorised by law.

Exam Warning

Exam Warning

Failing to report suspicion of money laundering is a criminal offence under POCA. For SQE1, remember that the obligation to report arises even if you only suspect money laundering, not just when you have proof. Do not tip off the client that a SAR has been, or will be, made. If you seek consent (DAML), observe the 7‑day decision period and any moratorium—proceeding with a prohibited act before consent is granted may itself be an offence.

Revision Tip

Revision Tip

Focus your revision on when to apply enhanced due diligence and when to submit a SAR. Practice identifying high-risk scenarios and the correct AML response. Learn the core regulation references (reg 18 risk assessment; reg 19 policies; reg 21 internal controls; reg 24 training; reg 27–28 CDD; reg 33–35 EDD; reg 40 record‑keeping) and the POCA offences (ss 327–333A). Remember that OFSI sanctions are separate but must be screened and reported.

Key Point Checklist

This article has covered the following key knowledge points:

• the main objectives of anti-money laundering legislation are to prevent, detect, and disrupt money laundering and terrorist financing
• AML obligations apply to solicitors and law firms, not just banks; the MLR 2017 apply to independent legal professionals when they participate in specified transactions
• the UK AML regime is based on POCA and the Money Laundering Regulations 2017; firms must document risk assessments (reg 18), policies (reg 19), internal controls (reg 21), training (reg 24), CDD/EDD (regs 27–35) and record‑keeping (reg 40)
• solicitors must apply a risk-based approach, conduct due diligence, monitor transactions, and report suspicious activity; failure to disclose under POCA (s 330) is an offence
• international standards (FATF) and cooperation shape UK AML law and practice; non‑compliant countries risk greylisting/blacklisting
• financial sanctions are overseen by OFSI; designated persons require licences for legal fees, and matches must be reported
• the Criminal Finances Act 2017 introduced a corporate offence of failure to prevent the criminal facilitation of tax evasion; firms need reasonable prevention procedures
• tipping off (POCA s 333A) and prejudicing investigations (s 342) are criminal offences; seek DAML and observe moratorium timing

Key Terms and Concepts

• money laundering
• anti-money laundering (AML) legislation
• regulated sector
• Financial Action Task Force (FATF)
• risk-based approach
• customer due diligence (CDD)
• beneficial owner
• enhanced due diligence (EDD)
• Politically Exposed Person (PEP)
• suspicious activity report (SAR)
• Money Laundering Reporting Officer (MLRO)
• Money Laundering Compliance Officer (MLCO)
• tipping off
• Office of Financial Sanctions Implementation (OFSI)