Money laundering - ignorance is no defence
16 September 2002
But this risk is often viewed as remote.
There are three key elements to anti-money laundering legislation. First, it is an offence to assist in laundering the proceeds of serious criminal activity. In the case of terrorist activities, it is an offence if the individual should have known or suspected the illegal source of funds. Second, it is an offence to warn anybody suspected of money laundering, or disclose to any third parties, that disclosure has been made to the relevant authorities. Third, it is no longer sufficient merely to refuse such business - it is an offence not to report knowledge or suspicion of such activities.
Consider the legislation in context: there are inevitably individuals in every profession who, for personal financial gain, assist the perpetrators of crime. To that extent, jail sentences of up to 14 years and fines provide deterrents. A recent trial concerns a partner in a law firm who is accused of assisting money laundering, with three counts of failing to disclose suspicion of money laundering by a subsequently convicted drug trafficker. "It could never happen here", is probably most lawyers' response, but do you have the systems in place to back up this assertion?
Money laundering may seem irrelevant to the majority in the legal profession, but this is a mistake. A lucrative piece of work can suppress natural caution and compliance considerations, particularly if a fee-earner is under pressure from peers or past poor performance. The legislation is clear that an individual has responsibilities beyond just not being directly involved, so the Money Laundering Regulations (1993) are best seen as a practical aid against unwitting involvement, rather than unnecessary bureaucracy.
These regulations include safeguards ranging from training staff in the identification of suspicious transactions to record-keeping. But above all firms must be seen to be pro-active, as the regulations explicitly dismiss ignorance. Law Society guidelines provide six golden rules: know the legislation; know the professional guidelines; know your business; know your client; train your staff; monitor compliance.
Frequently, the last three rules are not fully implemented, but to comply with anti-money laundering rules, firms must be able to promptly identify potential difficulties. Traditionally, law firms have been poor at developing and implementing take-on procedures for new clients. Procedures such as engagement letters, agreed fee budgets and billing schedules, along with evidence to support the client's identity, have historically been designed to protect the client from financial risk, difficulties with service delivery or poor advice. But the repercussions of not properly identifying clients can be far-reaching. Not only may the firm suffer poor performance and poor cashflow, its partners and staff risk jail if they do not satisfy money laundering regulations.
The culture of an organisation is valuable in assisting firms to successfully implement anti-money laundering procedures. First, develop procedures that ensure a client's identity can be independently verified and that this can be achieved cost-effectively and without significant disruption to the client. Second, train staff. Do not simply show a video, but explain how money laundering can occur, the anti-money laundering procedures in place and the consequences of non-compliance. Stage three is to regularly review and monitor compliance with the firm's procedures and to take appropriate action in revising procedures, re-educating staff or, ultimately, taking disciplinary action for non-compliance. Also, ensure that records include evidence to support compliance with internal procedures.
Regulation of legal practices has historically focused on internal matters. Client trust and confidentiality, while essential, make legal firms more susceptible to abuse. Conventional regulation acts in the interest of the client, whether that be an ethical code or the requirements of the Solicitors Accounts Rules. The anti-money laundering procedures that firms must adopt require firms to look objectively at their client and consider whether it is appropriate to act for the client - and not just from a commercial risk perspective. Failure to do so and to document accordingly could land the lawyer behind bars.