The Financial Action Task Force, an inter-governmental organisation set up to combat money laundering, has described lawyers as a class=”editor-rtfLink” href=”https://www.antimoneylaundering.org/lawyers_and_money_laundering.aspx#::text=In%202001%2C%20the%20FATF%20depicted,they%20provide%20to%20their%20clients

As a result, the legal industry is subjected to stricter regulations.

Checks for anti-money laundering can be a useful tool to combat money laundering. They allow lawyers and law firms to stay compliant while also preventing criminals from exploiting them.

This article will examine the legal profession’s anti-money laundering responsibilities. We will also look at how money laundering can be exploited and how it helps to prevent financial crime .

Responsibilities of the Legal Sector

The majority of anti-money laundering regulations fall to the private sector, and in some cases they are unclear in their instructions. These regulations are scattered across several Acts but there are two that are the most important. The Proceeds of Crime Act 2002, amongst others, mandates that AML regulations are applicable to the legal sector. The Money Laundering (Terrorist Financing and Transfer of Funds) Regulations of 2017 (MLR2017) defines the obligations of those bound by AML regulations.

Adopting a risk based approach is the first step. A company must understand and assess the threats they face in terms of money laundering and terrorist financing and then take appropriate measures to reduce that risk.

This is a responsibility that falls on the private sector, but it also requires an enormous amount of expertise and knowledge in the theory and practice behind money laundering.

Money Laundering: A Threat

The extent to which money laundering was pervasive in the economy, and therefore, regulations that would counteract it, were not well known until recently. Money laundering thrived in these conditions. Globally, it is estimated that approximately PS1.67 trillion in dirty money is laundered every year. This money flows mainly to the more stable economies of Western countries.

National Crime Agency estimate that laundering in the UK costs the economy PS100 Billion per year. The UK is the second most exploited country in the world after the USA. London has been a major money laundering city for many years, but this is largely due to lax regulations.

The UK government has responded by implementing a number of laws aimed at curbing money laundering. These include harsh penalties for companies that are found to be in non-compliance. These laws, while designed to prevent and frustrate money laundering and assist companies in identifying when they are targeted, do not reduce the risk of companies being exploited.

It is not because of the regulations themselves. They do not reduce the need to “wash” dirty money. Money launderers are criminals with sophisticated schemes that deceive professionals and are highly skilled in their laundering methods.

How money laundering exploits the legal profession

Financial Action Task Force said that “lawyers can be vulnerable to money laundering schemes because they are able to switch easily between advising clients on financial and tax matters, setting up trusts and corporations, and completing other financial transactions such as investing”. Money launderers also use lawyers to give their schemes a veneer or legitimacy.

money-laundering schemes are varied and constantly changing, but they all consist of three steps:

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  Placement: Entering physical gains that have been ill-gotten into the banking system, effectively turning them into digital currency.
  
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  Layering: A complex series designed to obscure the source of funds. These will usually involve several cross-border transactions and the more steps there are, the better.
  
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  Integration: At this point, the money has been ‘cleansed’ and can be placed in bank accounts or purchased as assets.
  

Lawyers and conveyancers are often targeted as part of the layering process.

TCSPs offer a variety of services to money launderers. The creation of complex corporate structures is one of the most common methods used by money launderers to hide the source of illicit funds, as well as the ultimate beneficial owner. Another method involves purchasing investments for them. Money launderers can also add legitimacy to their schemes by using services such as virtual offices and mail forwarding.

Conveyancers can be exploited because the sale and purchase of property is an extremely popular way to launder money. Money laundering schemes often involve the quick purchase and sale of property between corporations, with the buyer and the seller being the same person. Property can also be used to store wealth after it has been cleaned, and so is a common method for money laundering.

Money-launderers will also abuse legal practices or client accounts whenever possible. By transferring money in and out, the audit chain can be broken.

It’s important to remember that money launderers can be very good at their job. They will often appear as upstanding businesspeople and citizens, and they are able to take advantage of any service offered by the legal profession.

How AML Checks Help Lawyers

We have seen that being exploited in a money-laundering scheme is a constant and pervasive threat to the legal profession. Even if you are unknowingly involved in money laundering, the UK will punish you harshly, with fines, disqualification from your profession, and even jail time. It is not easy to detect these money-laundering schemes. It is assumed and required by law that the staff has sufficient training, expertise, and equipment to carry out their duties.

AML software allows lawyers to perform detailed background checks of potential business partners, which can be used as the basis for a risk assessment.

The subject submits a copy (usually of a passport or ID card) to the AML software.

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  Verify the authenticity of the ID documents by running the details through the database for the country in question.
  
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  Verify that the address given by the subject is real and that the person has been registered to live there.
  
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  Check the databases of international law enforcement agencies for links between the name and organised crime, money-laundering, or terrorism. This can be done directly or through an associate.
  
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  Some AML software checks the identity of the subject by allowing them to take a picture on their mobile device. The software then uses biometrics to confirm the subject’s identity.
  

It allows practitioners to confirm the identity of a person and to determine if they have any criminal convictions or links to criminal activities anywhere in the globe. It would be impossible for a human to perform this process manually. By removing the human element from your risk assessment, you can severely limit money launderers’ ability to defraud.

AML software can also confirm whether a person has political exposure by comparing them to a list of national and international sanctions. Since the invasion of Ukraine, this ability has become increasingly important for legal professionals as international interest in using sanctions as a punitive political measure against individuals has grown. Finding out that you had dealt with such a person would cause at least severe damage to your reputation.

Human intuition, professional training and knowledge are the basis of a risk-based strategy. By performing AML checks on criminals who may be attempting to take advantage of their services, lawyers can not only identify those individuals, but they also protect themselves from potential prosecution for violating AML regulations.