CQS - Anti-money laundering

1. CQS - Anti-money laundering CQS supporters 01/70

2. Course author This training course and assessment has been prepared by Emma Oettinger, former Law Society anti-money laundering policy officer. The Law Society would like to thank the members of the Conveyancing and Land Law Committee who kindly volunteered to review the content of this training and assessment. 02/70

3. 1. The legal context 03/70

4. Why is anti-money laundering important for law firms? Solicitors provide an important service to the community by providing legal advice, conveying properties and conducting a wide range of commercial transactions. Unfortunately not all clients who seek to use those services are legitimate. It is estimated that £15 billion is laundered through the UK every year. Criminals will often use businesses and companies as a front to help generate or launder the proceeds of their crime. They will also purchase properties and other assets with their criminal funds. Solicitors need to take care to ensure that their services are not used to assist criminals in these activities. If you do not take adequate precautions and your firm is used by a money launderer, you risk the following: criminal sanctions; disciplinary action from regulatory bodies; reputational damage; higher PII premiums; civil claims; loss of fees; loss of employment. 04/70

5. What is the legislative framework? Click each box to find out more. Money Laundering Regulations 2007 Proceeds of Crime Act 2002 Sanctions regimes The Money Laundering Regulations 2007 (the 'Regulations') require you to: carry out client due diligence, so that you know who you are dealing with; and conduct ongoing monitoring, so that you know what you are being asked to do and can spot warning signs of money laundering. 05/70

6. What is the legislative framework? Click each box to find out more. Money Laundering Regulations 2007 Proceeds of Crime Act 2002 Sanctions regimes • The Proceeds of Crime Act 2002 (POCA) contains the principal money laundering offences and defences. The principal money laundering offences are: • s.327 - concealing, disguising, converting or transferring criminal property; • s.328 - entering into a money laundering arrangement; • s.329 - acquiring, using or possessing criminal property; • where you know or suspect that the retainer involved criminal property. • POCA also contains an offence of failing to tell your firm’s Money Laundering Reporting Officer (MLRO) that you know or suspect (or had reasonable grounds for knowing or suspecting) that money laundering is occurring. • You don’t have to handle the money or the property in order to commit this offence and the person engaged in the money laundering does not have to be your client - it can be the other side or any other person. 05/70

7. What is the legislative framework? Click each box to find out more. Money Laundering Regulations 2007 Proceeds of Crime Act 2002 Sanctions regimes In addition to being alert to money laundering risks, you also need to be aware of the risks of breaching financial sanctions. Financial sanctions are issued by HM Treasury and prevent the use of all economic resources by or for the benefit of a designated individual, either directly or indirectly, without a licence. This will include purchasing or selling a property on their behalf. Currently sanctions apply to people involved in terrorist financing and to designated individuals connected to jurisdictions such as Iran, Syria, and Zimbabwe. It is not only foreign nationals who can be subject to sanctions, a number of UK nationals also appear on the sanctions list. 05/70

8. What is money laundering? Click each box to find out more. What is money laundering? What is criminal property? Money laundering means possessing or dealing with existing criminal property in any way, including entering into an arrangement to let anyone else do so. Attempted mortgage fraud is not money laundering as there is no existing criminal property, but once the mortgage obtained fraudulently has been drawn down into the firm’s account, money laundering will become an issue for the firm. A transaction does not have to make a profit for it to be money laundering. Criminals are not entitled to any of the proceeds of their crime, so even if they can retain part of the money or obtain an asset, such as a house, in order to create more criminal funds, they have come out on top. 06/70

9. What is money laundering? Click each box to find out more. What is money laundering? What is criminal property? Criminal property is defined in section 340 of POCA as: any property which is, or represents a person’s benefit from criminal conduct, where the alleged offender knows or suspects that it is such. Criminal conduct is all criminal conduct, and will generally include criminal conduct committed overseas. Property is: all property, whether situated in the UK or abroad, including money, real and personal property, things in action, intangible property and an interest in land or a right in relation to any other property. Criminal property can be direct (e.g. money from a drug deal) or indirect (the increase in the value of a property obtained by mortgage fraud). Criminal property also includes savings made from criminal activity, such as savings made from tax evasion. A person does not have to be convicted of the crime in order for you to suspect that their property is criminal property. 06/70

10. How does money laundering occur in property transactions? When confiscation orders are made against criminals, more often than not, they include real estate owned directly or indirectly by the criminal. As solicitors are involved in most property transactions, it is important to be vigilant. Common methods include: Direct investment in residential or commercial property with the proceeds of crime - this may involve unusual amounts of cash or private funding given the known socio-economic circumstances of the client. Use of third parties to hide who is the true owner - this may involve using family members, associates, mortgage mules, companies or trusts to complicate the purchase. Unusual funding arrangements - this may involve purchasing a property outright and then very quickly asking for a loan, getting funding from private sources rather than regulated financial institutions, or seeking a loan while offering a large amount of savings as a collateral. Flipping - which may or may not incorporate mortgage fraud, but involves transferring properties rapidly between criminals and their associates for increasing (or occasionally decreasing) values. 07/70

11. What are a law firm's anti-money laundering obligations? The Regulations require a law firm to: appoint a Money Laundering Reporting Officer (MLRO); establish and maintain appropriate and risk-sensitive policies and procedures for: - client due diligence and ongoing monitoring; - reporting; - record keeping; - internal control; - risk assessment and management; - monitoring, measurement and communication; train relevant staff. 08/70

12. What are your anti-money laundering obligations? While your specific obligations will depend on what your firm’s policies and procedures require you to do, for every property retainer you should: know who your client is, by following your firm’s client due diligence procedures; understand why you are being asked to conduct the property purchase or sale in the way the client wants it structured; understand the source of funds being used in the purchase and whether this is consistent with the economic circumstances and profile of your client; monitor the retainer for warning signs of money laundering and mortgage fraud; talk to your MLRO if you have any concerns. 09/70

13. Assessing money laundering risk There are two types of money laundering (and fraud) risk in conveyancing transactions: 1. Identity risk Is this client who they say they are (and are they a known criminal?) 2. Retainer risk Is this property or the funds being used to purchase the property the proceeds of crime? The next few sections will look at these types of risks in turn. But first, test your understanding of the legal context for your AML obligations: 10/70

14. Knowledge check - question 1 Is the following statement true or false? Criminal property does not include property located overseas. True False 11/70

15. Knowledge check - question 1 answer Is the following statement true or false? Criminal property does not include property located overseas. True False The correct answer is false. 11/70

16. Knowledge check - question 2 Is the following statement true or false? A transaction does not have to make a profit for it to be money laundering. True False 12/70

17. Knowledge check - question 2 answer Is the following statement true or false? A transaction does not have to make a profit for it to be money laundering. True False The correct answer is true. 12/70

18. Knowledge check - question 3 Is the following statement true or false? As an employee of a law firm I am required to comply with my firm’s AML procedures and talk to my MLRO if I have any concerns. True False 13/70

19. Knowledge check - question 3 answer Is the following statement true or false? As an employee of a law firm I am required to comply with my firm’s AML procedures and talk to my MLRO if I have any concerns. True False The correct answer is true. 13/70

20. Knowledge check - question 4 Is the following statement true or false? Only actual cash from criminal activity is criminal property. True False 14/70

21. Knowledge check - question 4 answer Is the following statement true or false? Only actual cash from criminal activity is criminal property. True False The correct answer is false. 14/70

22. 2. Managing identity risk 15/70

23. Why identify? Click each box to find out more. What is Client Due Diligence (CDD)? Importance of knowing who your client is • CDD means: • identifying and verifying the client by independent means; • Identifying and, on a risk based approach, verifying beneficial owners; • obtaining information on the purpose and intended nature of the business relationship. • Under the Regulations you are required to undertake client due diligence on all clients who are buying or selling real property. The Law Society takes the view that this includes the granting of leases over property, especially where they are long term leases. • When carrying out CDD you must ensure that you comply with the requirements in the CML Lenders’ Handbook as well as the Regulations. • You need to do client due diligence at the start of and throughout the retainer, as risk levels within a transaction may change on instructions from your client. You should certainly carry out CDD before you receive any funds. 16/70

24. Why identify? Click each box to find out more. What is Client Due Diligence (CDD)? Importance of knowing who your client is In property transactions it is important to know who you are actually acting for, not only for anti-money laundering reasons, but also to ensure that you avoid conflicts of interest, that the person has authority to act, that ownership is properly documented and that you are not being used to perpetrate a fraud. 16/70

25. Risks of identity fraud The Regulations require due diligence on all clients in relation to property transactions, however, not all will pose the same risk of identity fraud. While each firm will have undertaken its own risk assessment, as a rule of thumb the risk of identity fraud will follow a scale similar to this: At the base level of risk in terms of identity, are clients for whom you have acted before, who come into the office at the start of the transaction and are able to provide their passport, their water authority account and possibly a great bundle of paperwork relating to the property which you sent to them when you acted on the purchase a number of years previously. At the next level might be clients who you deal with face-to-face, who have all the paperwork to show their identity and their ownership of the property for a number of years, but for whom you have not acted before. At the level after that, may be clients for whom you have acted before, but because they both work, cannot come into the office and so they drop in their passports through the letter box, send you certified copies or whose identity you can only verify electronically. 17/70

26. Risks of identity fraud Further up the scale might be clients who are moving to the area and have been referred to you by the estate agent or the Law Society Find a Solicitor service and because of their current location you are unlikely to meet until after the transaction has completed. At the high end of the identity risk scale would be clients who are currently living abroad or purchases which are being conducted through companies or trusts, particularly if those are registered abroad, as it may be more difficult to verify their identity. With commercial property transactions you will often be dealing with businesses, in which case non face-to-face interaction may be more normal. In assessing identity risk the key issue will be whether the person you are dealing with is actually from the business they say they are from and that they have the authority to act on behalf of that business. The smaller and more distant the client business is from your firm the higher the risk of identity fraud. 18/70

27. Warning signs on identity risks Here are a few warning signs to be alert to which may suggest that there is a risk that the person is not who they say they are: the client is overly secretive or evasive; the client is using an agent or intermediary or otherwise actively avoiding personal contact without a good reason; there are attempts to disguise the real owner or parties to the transaction; the client’s age is not consistent with how long the Land Register says they have owned the property; the structures used for the purchase are overly complex; the business entity cannot be found on the Internet and/or uses an email address with a generic domain name (e.g. Hotmail, Gmail, and Yahoo!). 19/70

28. Identifying clients Click each box to find out more. What documents do I need for a natural person? What documents do I need for an entity? Your firm's AML procedures will specify what documentation you need to obtain when conducting client due diligence. Where there is joint or co-ownership for a property, you will need to identify all individuals for whom you act. Where the client is a natural person, it is generally recommended that you obtain a government document that verifies their name and either their date of birth or their address. Most firms will require you to obtain a passport or a photo driving licence. Some firms will use electronic verification either instead of, or in addition to, obtaining identity documents. Electronic verification can help identify certain attempted frauds more easily, such as criminals pretending to be people who recently died, and may help highlight other higher risk clients such as politically exposed persons or clients who are on a sanctions list. 20/70

29. Identifying clients Click each box to find out more. What documents do I need for a natural person? What documents do I need for an entity? Where it is simply not possible to obtain a passport, drivers licence or e-verification check, there are other documents you could consider which may adequately establish the client’s identity. These are listed in the Law Society’s Anti-Money Laundering Practice Note, but you should consult your own firm’s procedures first as usually they will require that a partner or the MLRO has to be told and agree to the alternative documents being used. Whether you obtain a passport, driving licence, e-verification check or some other document, the REALLY important thing is to look at them. They are of absolutely no use in preventing identity fraud or money laundering if they are just put on the file. You should also keep in mind and demonstrate compliance with your obligations within the CML Lenders’ Handbook. You should consider whether the information contained in those documents is consistent with what you know about the client (e.g. appearance, age, spelling of names) and whether it provides information which would indicate that there is a higher level of risk in the nature of the retainer (e.g. they are a politically exposed person from a high risk jurisdiction, or they are known to have convictions or be under investigation for acquisitive crime). 20/70

30. Identifying clients Click each box to find out more. What documents do I need for a natural person? What documents do I need for an entity? • When dealing with a trust or a business, such as a partnership, company, association or charity the key steps are to establish that the entity or arrangement actually exist and that the person you are dealing with has authority to make significant decisions like entering into property transactions. • Your firm will have its own procedures for what documents you require, but usually these will include: • certificates of incorporation; • company registry listing; • listing on a professional registry; • trust deeds; • charity registration; • listing on a reputable e-verification provider. • For entities and arrangements without a separate legal identity, you will need to identify as natural persons more of the individuals managing the entity, such the partners or the trustees. For companies, you will still need some identifying information about some of the directors, but it is only in higher risk cases you will need to obtain full identification information on all directors. 20/70

31. Identifying beneficial owners You will also need to carry out client due diligence on beneficial owners, where these exist, so that you understand who is involved in the transaction. While beneficial owners are not always criminals - in fact most are not - criminals sometimes use front-men or companies to try to disguise their involvement in transactions, so identifying any beneficial owners is crucial. Under the Regulations, 'beneficial owner' means the individual who ultimately owns or controls the client, or the person on whose behalf a transaction is being conducted. A person that has at least a 25 per cent ownership interest in the client will usually be a beneficial owner. If the client is owned by another entity, you will need to consider who owns that entity as well. If someone is acting as an agent or under a power of attorney, they will be the client, and the person on whose behalf they are acting will be a beneficial owner. Finally, if the intended ‘purchaser’ or ‘seller’ attends the office always in the company of another person, and it is the other person who is actually directing the transaction, then you should consider if the other person is a beneficial owner because of their control. 21/70

32. Identifying beneficial owners Such situations in the past have occurred where the client is entering into the transaction under duress or is actually a ‘mortgage mule’. Mortgage mules may have been trafficked into the UK, may have stolen or forged identity documents and be acting as fronts for the organised crime group. While historically used to help organised crime groups obtain mortgages over properties, they can also feature in cases where the purchase price is completely privately funded. You should look at your firm's policy and procedures for identifying the beneficial owner. You will generally need to obtain at least their name and record any other identifying details which are readily available. In higher risk cases you will also need to verify the identity of the beneficial owner. This verification can be through publicly available sources, information provided by the client, and in a small number of really high risk cases, identity documents from the beneficial owner themselves. 22/70

33. Should you identify others who provide funding? It is not unusual for property purchases to involve third party funding, for example, where parents are providing deposit money for a child. However, third party funding is also used as a method for criminals to obtain an interest in property without coming into contact with the solicitor conducting the transaction. There is no strict legal requirement under the Regulations to do due diligence on third parties who are not beneficial owners. However, as it is the source of funds themselves which pose the real risk of being criminal property, the Law Society strongly advises that you should take some steps to identify and possibly verify the identity of the persons or entities providing the funding. This is useful not just from a money laundering perspective, but you will also need to consider what interest that third party will have in the property, whether they will need independent legal advice, how their interest in the property (either ownership or charge) will be documented and registered, and whether there are tax or mortgage implications as a result of this third party funding. 23/70

34. Enhanced due diligence Click each box to find out more. When do I conduct enhanced due diligence? Non face-to-face clients Politically Exposed Persons • Under the Regulations, certain types of clients are deemed to pose higher levels of risk than others, and therefore enhanced due diligence is required. In some cases the enhanced due diligence is required because of increased risk of identity fraud, and in other cases because the identity of the client means there is a greater risk of them having access to the proceeds of crime. • You need to carry out enhanced due diligence in the following circumstances: • where a client is dealt with other than face-to-face; • where a client is a Politically Exposed Person (PEP); • in any other situation which presents a higher risk of money laundering. • Your firm will have procedures for what documents or processes are required for enhanced due diligence, but generally the following methods apply: • getting further verification of the client or beneficial owner's identity; • asking for more detail on the ownership and control structure of the client; • asking for further information on the purpose of the retainer or the source of the funds; and/or • conduct enhanced ongoing monitoring. 24/70

35. Enhanced due diligence Click each box to find out more. When do I conduct enhanced due diligence? Non face-to-face clients Politically Exposed Persons • In many cases, where a person is trying to commit fraud or engage in money laundering they will try to limit the contact they have with the professionals engaged in the transaction. This gives them more scope to use an alias or fraudulently use the identity of real people. It also reduces the amount of coaching they have to do for mortgage mules and limits the level of real questioning the professional can undertake. • In practice, firms will often ask for: • e-verification as well as obtaining a copy of an identity document; • having the identity document certified by another solicitor, professional, bank, GP or through the Post Office verification service; • payment of funds for disbursements to come from a bank account in the client’s name. • Your firm will have considered the requirements of the CML Leaders’ Handbook when deciding what measures will be adopted for enhanced due diligence in non face-to-face situations. 24/70

36. Enhanced due diligence Click each box to find out more. When do I conduct enhanced due diligence? Non face-to-face clients Politically Exposed Persons • Not all Politically Exposed Persons (PEPs) are criminals. However, there have been a number of cases of people who are appointed to political positions, who abuse their power for personal gain. In many cases they will seek to move these ill-gotten gains out of the country where they are in power and in recent years, property in the UK has been a favoured destination. • The list of people who qualify as a PEP is extensive. It covers any person who has been entrusted within the last year with one of the following prominent functions by a Community institution, an international body or a state other than the UK: • heads of state, heads of government, ministers and deputy or assistant ministers; • members of parliament; • members of supreme courts, of constitutional courts, or other high level judicial bodies; • ambassadors, chargés d’affairs and high ranking officers in the armed forces; • members of the administrative, management or supervisory bodies of state-owned enterprises. 24/70

37. Enhanced due diligence Click each box to find out more. When do I conduct enhanced due diligence? Non face-to-face clients Politically Exposed Persons • It is expected that from the end of 2014 you will also have to consider people holding these roles in the UK as PEPs. • A PEP is also a family member and a known close associate of a primary PEP. A known close associate is a person with whom there are close business relationships, joint ownership of entities or beneficial ownership of entities set up by the primary PEP. • Where your client is a PEP: • You will need to get senior management approval to act for them. • You will need to consider their source of wealth as well as the source of funds for this specific transaction. • You will need to watch more closely for warning signs of money laundering. In these types of cases this could include government or company funds being used to pay for private expenditure or the involvement of complicated structures for ownership of the property or it being put in the names of third parties. 24/70

38. What about clients I've known forever? Sometimes you will be asked to act for family members, people you studied with or whom you have known socially or through business for years. You may well ask why is it necessary to undertake due diligence on them... after all the reason they are instructing you is that you know them. While the risks of identity fraud are lower here: having a copy of a passport on file and verified contact details will help to reduce the risk of fraudsters impersonating them and duping others in your firm into selling their property; and you may move on from your current firm leaving them without access to the individual who can verify the client’s identity in the future. MLROs may decide in exceptional circumstances that it is appropriate for the partner or fee earner who knows the client to provide a certificate outlining how they know the client and that the identity details are correct. However, most clients will be used to providing identity documents when dealing with professionals and when undertaking significant transactions. So, as a general rule, undertaking normal client due diligence is still advisable to ensure that the firm has proper records. 25/70

39. Checking sanctions lists There is no specific requirement for law firms to check every client against the sanctions list, but dealing in the economic resources of a designated person is a criminal offence. Banks will screen most or all payments against the sanctions list, including the name of the sender, the recipient and the reason for payment. While some firms may be tempted to leave consideration of sanctions to the bank, on the basis that they will find out if there is a problem when the bank stops the payment, this is likely to cause significant stress and challenges for the client and the firm if it happens on the day of completion. If there is a false/positive hit (i.e. the client is not a designated person but they have a similar name to someone who is) then it may still take some hours or days to liaise between the client and the bank to help them establish that your client is not a designated person. If, however, your client is on the sanctions list, you will require a licence from the Asset Freezing Unit and this can take some weeks to obtain. Your firm will have a procedure for undertaking sanctions checks and if they use e-verification these should happen automatically. However when reviewing your client due diligence material you should consider at an early stage whether there is any link to a jurisdiction which is subject to sanctions (e.g. Iran, Syria etc.) which mean you should check the sanctions list to be sure it is legally permissible to undertake the transaction. 26/70

40. Knowledge check - question 1 Is the following statement true or false? All clients present the same risk of identity fraud. True False 27/70

41. Knowledge check - question 1 answer Is the following statement true or false? All clients present the same risk of identity fraud. True False The correct answer is false. 27/70

42. Knowledge check - question 2 Is the following statement true or false? A beneficial owner is a person who ultimately owns or controls a client, or on whose behalf the transaction is undertaken. True False 28/70

43. Knowledge check - question 2 answer Is the following statement true or false? A beneficial owner is a person who ultimately owns or controls a client, or on whose behalf the transaction is undertaken. True False The correct answer is true. 28/70

44. Knowledge check - question 3 Is the following statement true or false? It is advisable to identify third parties who provide funding for a property purchase. True False 29/70

45. Knowledge check - question 3 answer Is the following statement true or false? It is advisable to identify third parties who provide funding for a property purchase. True False The correct answer is true. 29/70

46. Knowledge check - question 4 Is the following statement true or false? Only foreign people are on the sanctions list. True False 30/70

47. Knowledge check - question 4 answer Is the following statement true or false? Only foreign people are on the sanctions list. True False The correct answer is false. 30/70

48. 3. Managing retainer risks 31/70

49. What are the retainer risks? While there are a lot of things that can potentially go wrong in a property retainer, we are going to focus on the risks of money laundering. As stated earlier, you must have existing criminal property in order to engage in money laundering. So this is either the house itself or the money for the purchase. The property itself may be criminal property if: it was bought with the proceeds of crime; mortgage or loan repayments were made with the proceeds of crime; there have been criminal regulatory breaches relating to the house which have saved the owner money. Whether the property or the purchase price is the proceeds of crime, key techniques for laundering through property include: direct investment - where often there will be significant levels of cash or private funding or unusual collateral arrangements; obscuring of ownership - through purchasing through others or via companies or trusts; transferring value between individuals in a criminal group - through flipping or repeated sales at increasing or decreasing values. The normal requirement to provide money for fees, expenses and deposits is also another factor which may interest criminals seeking to launder money. Paying those funds into your firm’s account, then saying that the purchase/sale fell through and asking for you to either return the funds to them or to third parties is a way to make funds look more legitimate to banks and others in the future. 32/70

50. Source of funds and other risks You are not required to prove that the source of funds are clean, but that they are consistent with the client’s risk profile and means and that there is no other information which would give rise to a suspicion that the funds are from an illegitimate source. While each firm will have undertaken its own risk assessment, as a rule of thumb the risk relating to source of funds will follow a scale similar to this: At the lowest level of risks might be a married couple selling their two bedroom house to buy a larger property because a baby is on the way, with the difference between sale and purchase price being funded by an increased mortgage. Or it might be an elderly couple selling their large house to downsize to a retirement flat and purchasing the new property entirely from the proceeds of sale. A first-time buyer obtaining a high percentage mortgage with the benefit of some accumulated savings or perhaps a gifted deposit from family members, may also be lower risk (bearing in mind the need to understand whether the gift from family members is consistent with the family members’ risk profile and means). A local business or a well known large company with recent audited accounts showing good turnover, purchasing larger premises with some private funding and a loan from a regulated financial institution may also be lower risk. Significant levels of cash or private funding (even if it is in a bank account) will increase the level of risk and should cause you to consider whether the funding is proportionate with the socio-economic or business profile of the client. 33/70