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Money laundering – the risk that just won’t go away

28th November 2014

Hot off the press from the SRA is the November update to its 2014/2015 Risk Outlook along with two risk papers. The first is entitled “Cleaning Up” and deals with money laundering while the second is somewhat sinisterly entitled “In the shadows” and focuses on bogus firms.

Bogus firms have had a lot of press over the past 12 months with the SRA reporting a steady increase of bogus activity and the legal press churning out enough juicy headlines to keep everyone interested. In contrast, headlines about money laundering, unless exceptionally sensational, are easy (unless you are an MLRO!) to dismiss as boring and skip over in search of something new. Why? Simply because it has been around so long that familiarity has, for some, bred contempt.

The bottom line is that the SRA flags it as a current issue because we have a problem and that problem takes the form of an estimated £57 billion laundered through the UK each year. If we want to put this figure in context it is around 10 times the amount of profit that the top 100 law firms combined make each year. Who says crime doesn’t pay!

For obvious reasons, no one can put an exact figure on how much of this estimated £57 billion gets laundered through law firms but we know it is unlikely to be an negligible proportion. In 2012/2013 the legal sector alone made 3935 suspicious activity reports and indications are that the figure is growing year on year. The odds are, at some point, someone in your firm is going to be concerned enough to want to make a report to the National Crime Agency (NCA). We also know that certain sectors such as conveyancing are high risk because property purchases enable criminals to legitimise the proceeds of crime in large amounts.

Current Trends

The SRA flagged a number of trends, all of which have been around for a while, but the profession is clearly still getting duped by criminals. Unsurprisingly these are also risk areas we often flag when invited by COLPs and COFAs to audit firms. Noteworthy are:

  • Failure to conduct appropriate identity checks. The SRA conducted a survey in 2012 and found that 1 in 4 of the firms sampled had managed to nip things in the bud by catching out fraudsters who were attempting to avoid or cheat identity checks. We need to remember that criminals talk and they will share information about firms who are lax in this regard. Often we come across a robotic mentality when it comes to client ID checks. Passport TICK; Utility Bill TICK. It’s just not that simple. Very few people have sufficient training to be able to spot a fake document so unless you use some sort of 3rd party software how can you be confident the documents are legitimate?
  • Failure to conduct due diligence on source of funds. In our experience this is a real problem. Your staff need to know the difference between source of funds and source of wealth and they need to be trained about the questions to ask and relevant supporting documents to ask for if needed.
  • Criminals infiltrating law firms by placing someone in the firm. This is the sort of problem that the probity checks in quality standards like CQS are supposed to be stamping out but clearly it is still an issue. What checks do your HR departments undertake to ensure you are not employing a criminal mastermind?

Practical tips:

  • Fraudsters do this for a living and your firm may be the next target so put money laundering, bogus firms, mortgage fraud and any other vulnerabilities you may have on your risk register;
  • Know your client! The money laundering requirements are there for a reason so make sure that the appropriateness of client due diligence is considered at a sufficiently senior level and not delegated to the most junior member of your team because no one wants to do it and it has been turned into a tick box exercise;
  • Make sure that your client identification process is relevant to the type of clients your staff deal with. This means that if you regularly encounter a particular client demograph e.g. unincorporated associations or overseas clients from high risk jurisdictions tell your staff what they need to do! This will empower them with the confidence to ask the right questions;
  • Consider the benefits of using an e-verification service;
  • Train staff so that they are confident about how to approach clients when it comes to source of funds and source of wealth;

The sad reality is that fraudsters are not going to go away. With each new horror story we may become a little more discerning about who we do business with and savvier at protecting ourselves from exposure to bogus firms and unwitting involvement in money laundering, but it’s perhaps a little naive to think that without taking the time to identify the relevant risks and consider the appropriateness of third party support we can outsmart the professional fraudsters every time.



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