Learning Outcomes
After studying this article, you will be able to explain the purpose and scope of anti-money laundering (AML) legislation, including its international context. You will understand the main objectives of AML laws, the core requirements imposed on solicitors and law firms, and the global standards that shape UK regulations. You will be able to identify key terms, apply the rules to practical scenarios, and recognise the significance of international cooperation in combating money laundering for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the purpose and scope of anti-money laundering legislation, including the international context. Focus your revision on:
- 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
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.
- What are the main objectives of anti-money laundering legislation?
- Name two international bodies or standards that influence UK AML law.
- When must a solicitor apply enhanced due diligence measures?
- What is the purpose of a suspicious activity report (SAR) and to whom is it submitted?
- 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.
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
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.
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
- creating, managing, or operating companies, trusts, or similar structures
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.
The European Union also issues directives that member states must implement. The UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) reflect both FATF recommendations and EU directives.
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.
Key Term: risk-based approach
Assessing and managing money laundering risks according to the nature of the client, transaction, and services provided.
Customer Due Diligence (CDD)
Firms must verify the identity of clients and beneficial owners before establishing a business relationship or carrying out certain transactions.
Key Term: customer due diligence (CDD)
The process of identifying and verifying the identity of clients and understanding the nature of the business relationship.
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
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.
Key Term: enhanced due diligence (EDD)
Additional checks and ongoing monitoring required for higher-risk clients or transactions.
Reporting Obligations
If a solicitor knows or suspects money laundering, they must submit a suspicious activity report (SAR) to the firm’s nominated officer (often called the Money Laundering Reporting Officer, or MLRO), who may then report to the National Crime Agency (NCA).
Key Term: suspicious activity report (SAR)
A report made to the authorities when there is knowledge or suspicion of money laundering.Key Term: Money Laundering Reporting Officer (MLRO)
The person within a firm responsible for receiving internal reports and making external disclosures to the NCA.
Record-Keeping
Firms must keep records of CDD checks, transactions, and internal/external reports for at least five years.
Internal Controls and Training
Firms must have written policies, appoint a compliance officer, and provide regular AML training to staff.
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.
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, monitor the transaction, and, if there are grounds for suspicion, submit a SAR to the MLRO.
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 the source of funds, and consider whether to proceed. If suspicion remains, the solicitor must report the matter to the MLRO and not proceed with the transaction until cleared.
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.
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.
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 UK AML regime is based on POCA and the Money Laundering Regulations 2017
- solicitors must apply a risk-based approach, conduct due diligence, and report suspicious activity
- international standards (FATF) and cooperation shape UK AML law and practice
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)
- suspicious activity report (SAR)
- Money Laundering Reporting Officer (MLRO)
