Money laundering and financial services - Money laundering

Learning Outcomes

After reading this article, you will be able to identify and explain the main forms of money laundering offences under English law, understand the obligations of legal professionals under anti-money laundering regulations, and apply the principles of reporting suspicious activity and available defences. This will equip you to analyse typical SQE2 exam scenarios involving money laundering in the context of legal and financial services practice.

SQE2 Syllabus

For SQE2, you are required to understand the legal framework for money laundering from a practical standpoint. In your preparation, focus your revision on:

• The main criminal offences relevant to money laundering under UK law.
• The legal and regulatory duties imposed on solicitors and firms regarding money laundering prevention.
• The requirements for suspicious activity reporting, including timing, procedure, and correct recipients.
• The scope of customer due diligence and identification obligations.
• The role of defences, including privileged circumstances and adequate consideration.
• The offences of tipping off and prejudicing an investigation, and the scope of exceptions.
• The application of anti-money laundering procedures to typical legal practice scenarios.

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. Which of the following is NOT a principal money laundering offence under English law?
   1. Concealing
   2. Arranging
   3. Failing to keep client ledgers
   4. Acquisition, use, or possession
2. In which situation must a solicitor make a suspicious activity report?
   1. They have mere curiosity about a client’s transactions.
   2. They know or suspect that a client is engaged in money laundering.
   3. A client refuses to pay their bill.
   4. A client withdraws from a proposed transaction for legitimate reasons.
3. Which defence may excuse a solicitor from the duty to make a suspicious activity report?
   1. The information is covered by legal professional privilege
   2. The solicitor believes the client is honest
   3. The client is located abroad
   4. The client has paid upfront

4. True or false? Tipping off is always an offence, even when the solicitor is seeking further information from a client about the origins of funds.

Introduction

Money laundering law is a core SQE2 topic. Candidates must understand how money laundering offences apply in practice and what duties are imposed on solicitors and financial service professionals. Key focus areas are the principal criminal offences, regulatory obligations, reporting requirements, and common defences.

Principal Money Laundering Offences

Money laundering is the process of hiding, converting, or cleaning criminal property to give it the appearance of lawful origin. UK law contains several main offences relating to money laundering.

Key Term: criminal property
Criminal property is any asset, including money, derived from or representing the benefit of criminal conduct, regardless of where the predicate crime occurred.

Key Term: money laundering
Money laundering is the process of concealing, converting, arranging, acquiring, using, or possessing criminal property.

Main Offences

The principal offences under the Proceeds of Crime Act 2002 are:

• Concealing, disguising, converting, transferring, or removing criminal property.
• Arranging to facilitate the acquisition, retention, use, or control of criminal property.
• Acquiring, using, or possessing criminal property.

A person may be guilty if they know or suspect the property is criminal property.

Key Term: suspicion (money laundering context)
A state of mind where there is a possibility, which is more than fanciful, that relevant facts exist—less than actual knowledge or belief.

Worked Example 1.1

Scenario: A solicitor helps a client transfer money from a sale which the client describes as “quick cash from a friend.” The solicitor is not told the source but sees several cash deposits from unknown individuals. Should the solicitor be concerned about a money laundering offence?

Answer:
Yes. If the solicitor suspects that the money may be criminal property, proceeding with transactions could constitute an arrangement offence if they facilitate the use or control of criminal property.

Application Stages of Money Laundering

The three classic stages are placement (introducing illegal funds into the system), layering (obscuring the origin through multiple transactions), and reintroduction (placing funds into legitimate assets or businesses). Legal professionals are most likely to be involved at the layering or reintroduction stages, for example, when handling property transactions or managing client funds.

Key Term: placement
The introduction of criminal property into the financial system.

Key Term: layering
Series of complex financial transactions to disguise the origin of criminal property.

Key Term: reintroduction
Making laundered money appear legitimate by returning it to the economy as apparently clean assets.

Duty to Report Suspicion

Solicitors and regulated firms must report to the National Crime Agency (NCA) or their firm’s Money Laundering Reporting Officer (MLRO) when they know, suspect, or have reasonable grounds to suspect money laundering.

Key Term: suspicious activity report (SAR)
A formal report filed with the NCA or MLRO when there are grounds to suspect money laundering or terrorist financing.

Failure to report is a separate criminal offence for those working in the regulated sector, even if the predicate criminal property is not handled directly.

Procedure and Timing

Reports must be made promptly, ideally before the relevant transaction takes place. If a transaction is urgent or cannot be delayed, a report should be made as soon as practicable.

Solicitors must not inform the subject of a report (“tipping off”), as this is itself an offence unless an exception applies.

Worked Example 1.2

Scenario: While acting in a residential property purchase, a solicitor receives £95,000 in cash from a new client for the deposit. The client refuses to provide satisfactory evidence of identity. What must the solicitor do before proceeding?

Answer:
The solicitor should decline to proceed, report the matter to the firm’s MLRO, and may need to make a suspicious activity report if they suspect money laundering. Accepting cash from an unknown source is a red flag.

Customer Due Diligence

Firms subject to the Money Laundering Regulations 2017 must perform “customer due diligence” (CDD) at the outset of new business relationships or high-value transactions.

Key Term: customer due diligence (CDD)
The process of identifying and verifying a client’s identity and, where applicable, any beneficial owner of client funds.

CDD procedures include verifying the identity of clients, understanding the purpose of the retainer, and monitoring transactions for suspicious activity. For trusts or companies, firms must verify the identity of beneficial owners.

Key Term: beneficial owner
The individual(s) who ultimately own(s) or control(s) a client or asset.

If adequate CDD cannot be performed, the firm must not proceed with the transaction and should consider making a suspicious activity report.

Defences and Privileged Circumstances

A limited number of defences excuse a solicitor or person from liability for a principal money laundering offence.

Key Term: authorised disclosure
A formal notification made to the NCA or MLRO prior to (or as soon as practicable after) a transaction to report suspicion of money laundering and seek consent to proceed.

Making an authorised disclosure or reporting suspicion before the act is committed is generally a defence.

There are exceptions for information obtained in privileged circumstances or subject to legal professional privilege.

Key Term: legal professional privilege
A rule that protects confidential communications between legal advisers and their clients concerning legal advice or contemplated litigation from disclosure.

Key Term: adequate consideration
A defence for those who acquire, use, or possess criminal property for value and in good faith, provided there is no knowledge or suspicion of illegality.

Worked Example 1.3

Scenario: A solicitor’s client pays legal fees from an account that is later found to contain proceeds of crime. The fees were reasonable and for genuine legal work. Is the solicitor criminally liable?

Answer:
If fees are for legitimate services at usual rates and there is no suspicion of crime at the time payment is received, the solicitor may rely on the defence of adequate consideration.

Tipping Off and Prejudicing Investigations

Revealing that a suspicious activity report has been made, or that an investigation is ongoing, risks prejudicing investigations and is itself a criminal offence—commonly called “tipping off.” Exceptions are limited.

Enquiries made directly of a client about their source of funds before making a SAR are not usually tipping off. However, warning a client after a SAR has been submitted or implying that authorities are investigating can amount to an offence.

Key Term: tipping off
The criminal offence of informing a person that a report or investigation into money laundering has occurred, potentially prejudicing the case.

Key Term: prejudicing an investigation
The offence of taking steps to obstruct or undermine a money laundering or terrorist financing investigation, including destroying relevant evidence.

Worked Example 1.4

Scenario: After making a suspicious activity report, a solicitor is contacted by the client asking why their transaction has been delayed. Can the solicitor explain the cause?

Answer:
The solicitor must not disclose the existence of a SAR or NCA involvement. Only a generic response about regulatory compliance or process delays is appropriate.

Penalties and Regulatory Supervision

Money laundering offences carry maximum sentences of up to 14 years’ imprisonment and/or an unlimited fine. Regulatory bodies expect firms to implement training, maintain records, and appoint a qualified MLRO.

Failing to have suitable procedures, or failing to adequately train staff, can result in professional sanctions and prosecution of both the firm and its responsible individuals.

Key Point Checklist

This article has covered the following key knowledge points:

• The main criminal money laundering offences under English law are concealing, arranging, and acquisition, use, or possession of criminal property.
• Solicitors and relevant staff must make prompt suspicious activity reports when there is knowledge, suspicion, or reasonable grounds to suspect money laundering.
• Customer due diligence and identification procedures are mandatory before acting for clients in the regulated sector.
• Authorised disclosures and legal professional privilege can excuse failure to report in certain circumstances.
• Tipping off and prejudicing investigations are separate criminal offences with limited exceptions.
• Failure to comply with anti-money laundering procedures can result in professional and criminal sanctions.

Key Terms and Concepts

• criminal property
• money laundering
• suspicion (money laundering context)
• placement
• layering
• reintroduction
• suspicious activity report (SAR)
• customer due diligence (CDD)
• beneficial owner
• authorised disclosure
• legal professional privilege
• adequate consideration
• tipping off
• prejudicing an investigation