Clean up your act
28 June 2004
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25 October 2004
Now that most firms have had their basic money laundering training completed, many are realising that this is only the beginning. The leading international practices are discovering the demands of compliance on a daily basis as their partners and staff report that systems put in place are in some way unworkable.
The issues firms are grappling with only begin with the formalising of procedures and putting them down into their office manuals.
Firms need to realise that there are professional indemnity issues to take into account. They need to review their terms of engagement to help protect them from avoidable liability. Issues include: damages for delay caused by notification to the National Criminal Intelligence Service (NCIS) holding up a deal; breach of confidentiality where your suspicions prove not to have been justified; refusing to complete when client funds come in shortly before completion from an unexpected or unacceptable source; and client requests for return of files containing documents the legislation requires you to retain. Attempts to limit liability for these and other matters will need to comply with Law Society rules on limiting liability and provisions in the Solicitors Act 1974.
Law firms also need to ensure that their systems for notifying professional indemnity insurers of circumstances that might give rise to a claim are effective. It could make all the difference to the firm’s entitlement to cover, particularly the cost of emergency proceedings.
Several firms have realised that careful thought needs to go into what constitutes ‘relevant business’.
Imposing firmwide identification checks might seem a good start in terms of compliance, but if it is going further than necessary and is potentially damaging to the business, it may need rethinking.
An international firm with a substantial litigation practice could find itself in the position where, for example, a US client telephones with instructions to obtain an injunction. The client might give specific instructions that do not involve any relevant business, but if the law firm, imposing a blanket system, requires identification evidence of the same type it has laid down for its other clients, the client goes elsewhere. In these circumstances the firm might need to consider whether its requirements should be modified.
Corporate work also has its share of risks.
Prosecutions over high-profile corporate collapses and accounting scandals in the US and Europe and illicit share price support schemes demonstrate how easy it is to become involved in issues that might be caught by the new legislation. Although many of those cases preceded the new money laundering laws, their wide ambit could result in money laundering compliance issues and prosecutions in future. It is easy to see how compliance could be overlooked when many deals involve working through the night and lawyers are not in prime condition. Recent suggestions of firms seeking client agreement to a lower standard of care for late-night working, impracticable though they might sound in that context, demonstrate the need for 24/7 vigilance.
Employment lawyers, whose work might be outside the regulated sector, might act for clients who are regulated and who need reminding of their reporting obligations, for example where staff are dismissed for dishonesty. If the employee brings a claim for unfair dismissal because the company has failed to go through the proper procedures, settlement of the dispute might constitute an arrangement that would itself be an offence.
Firms handling personal injury litigation also need to consider this issue. While there is no guarantee that they will not be exposed to a number of compliance issues, possibly including assistance in an ‘arrangement’, there may be risks to their business if a volume source of instructions, such as a trades union or claims management company, decides that clients are being better served elsewhere.
Addressing all these issues is part of a risk-based approach to compliance. Under Regulation 3 of the Money Laundering Regulations, all firms in the regulated sector must establish such procedures of internal control and communication as might be appropriate for the purposes of forestalling and preventing money laundering. The Law Society guidance advises that this means that each firm must consider how it conducts its practice, and whether, in addition to the arrangements for reporting and training, there are any procedures that should be introduced to satisfy this Regulation 3 requirement.
The risk-based approach to implementing a money laundering strategy has been endorsed in other sectors, notably by the Joint Money Laundering Steering Committee and the Financial Services Authority. There is every reason for professional firms to adopt a similar approach, indeed Regulation 3 might be interpreted as making it mandatory.
Although fears of the NCIS being overwhelmed have proved to be unfounded, there are concerns about some firms over-reporting out of a misguided attempt to ensure compliance. The NCIS has warned that spurious over-reporting is as bad as no reporting at all.
Firms also need to ensure that their procedures, decisions and reasons for them are fully documented.
That way they can learn from experience. It will also help introduce consistency of approach and should ultimately help cut the cost of compliance.
They also need to ensure they have a good audit trail for the documentation. When questions come to be asked in five years time about what training was given to the newly-qualified lawyer dealing with the job under investigation, they need to be able to demonstrate exactly what was in place at the time and that the individual signed for the training and documentation they received.
Except in the smallest of firms, the firm’s money laundering reporting officer will not know all the clients and may not have a real grip of the practical aspects of the work of all the firm’s departments, which may include those giving the firm the greatest risk. A practical tip is to have an initial assessment of risk by a working party drawn from the firm’s fee-earning and accounts departments. The people involved in the process need to be senior and experienced enough to identify the risk and help the money laundering officer communicate the message to the rest of the firm.
Finally, firms also need to audit to ensure compliance.
Even firms which have devoted considerable effort to putting in systems and training have uncovered widespread non-compliance in the early stages of implementation.
Nick Pointon is group development director of professional indemnity insurance provider PYV
This article was co-written by Frank Maher and Sue Mawdsley - partners at Legal Risk