Money laundering traps for the unwary
17 June 2008
29 July 2013
11 February 2014
28 May 2013
7 June 2013
31 January 2014
Lawyers are constantly bombarded with warnings concerning any failure to comply with the Money Laundering Regulations 2007 (MLR 2007). The theory of these warnings is simple enough, but when applied in practice, it is all too easy to find yourself in breach of the law.
For example, Mr Smith is a partner in a firm which has acted for Mr Jones, a property developer. Mr Smith knew that he had to identify and verify Mr Jones’ identity “on the basis of documents, data or information obtained from a reliable and independent source” as per Regulation 5(a) of MLRO 2007.
However, Mr Smith did not personally copy the original of Mr Jones’ passport, driver’s licence and home utility bill as evidence of Mr Jones’ identity. Mr Smith fell into the trap of accepting ready made copies of Mr Jones’ identification documentation, which were not therefore obtained “from a reliable and independent source”. Mr Jones may not be Mr Jones at all, but someone far more sinister, much to Mr Smith’s personal cost.
Timing of Verification
Mr Smith knew that these identity checks should be undertaken “before the establishment of a business relationship or the carrying out of an occasional transaction”, as per Regulation 9(2) of MLR0 2007. Mr Smith sought to rely upon Regulation 9(3) of MLRO 2007, which enabled him to undertake the verification process “during the establishment of a business relationship if (a) this is necessary not to interrupt the normal conduct of business; and (b) there is little risk of money laundering or terrorist financing occurring, provided that the verification is completed as soon as practicable after contact is first established”.Mr Smith acted before the identity verification procedure had been completed, leaving him open to having worked for a money laundering organisation and potentially being charged as a co-conspirator.
The verification exercise in relation to a company is more complicated as Mr Smith is under a constant obligation to identify the beneficial owner which, if a body corporate, includes any “body other than a company whose securities are listed on a regulated market, ultimately owns or controls (whether through direct or indirect ownership or control, including through bearer share holdings) more than 25% of the shares or voting rights in the body”, pursuant to Regulation 6(1)(a) MLRO 2007.
Mr Smith knew that he “must conduct ongoing monitoring of a business relationship”, pursuant to Regulation 8 MLRO 2007, which involves “(a) scrutiny of transactions undertaken throughout the course of the relationship (including where necessary the source of funds to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, his business and risk profile; and (b) keeping the documents, data or information obtained for the purpose of applying customer due diligence measures up-to-date”. Money launderers sometimes enter the business chain at a later stage, long after the initial money laundering checks. Mr Smith must ensure that ongoing monitoring takes place so as not to be in breach of Section 328(1) of the Proceeds of Crime Act 2002 which states that a person commits a money laundering offence “…if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person”.
Lawyers are often too reliant upon the initial money laundering checks that they have undertaken, not complying with their obligations to continually monitor the situation. A refusal to properly resource this exercise and to review a client’s transactions for so called “red-flag” behaviour e.g. tax evasion, unusual or improbable business purpose, can lead to professional ruin and even imprisonment.
Simon Paget-Brown and James Hilsdon are solicitors at The Khan Partnership