Table of Contents
Table of Cases and Legislation xvi
List of Abbreviations xx
Acknowledgments xxi
1 Anti-money laundering and the UK legal profession 1
1.1 Introduction 1
1.2 Background to money laundering 10
1.3 Money laundering methods and vulnerabilities affecting the legal profession 13
1.3.1 Misuse of lawyers' client accounts 14
1.3.2 Property purchases 15
.3.3 Setting up and management of companies and trusts 16
1.3.4 Sham litigation /fictitious claims 17
1.3.5 Managing client affairs and other methods 18
1.3.5.1 Managing client affairs and the use of specialised legal skills 18
1.3.5.2 Providing legal services for charities 18
1.3.6 The UK-England and Wales 18
1.4 Conclusion 19
2 The UK AML regime 20
2.1 Background 20
2.2 POCA 2002 overview 21
2.3 Substantive money laundering offences - ss 327-9 POCA 2002 22
2.3.1 Sections 327-9 POCA 2002 offences 23
2.3.2 Exemptions under ss 327-9 POCA 2002 24
2.4 Failure to disclose: regulated sector - ss 330/331 POCA 2002 27
2.4.1 Section 330 POCA 2002 offence - 'required' disclosures 28
2.4.2 Exemptions under s 330 POCA 2002 30
2.4.3 Section 331 POCA 2002-failure to disclose: nominated officers in the regulated sector 30
2.5 The role of suspicion in the UK AML regime 31
2.6 Legal professional privilege (LPP) 33
2.7 Tipping off in the regulated sector-s 333A POCA 2002 35
2.7.1 The tipping off offences under s 333A POCA 2002 35
2.7.2 Exemptions from the tipping off offences under s 333A POCA 2002 36
2.8 Section 342 POCA 2002 - offences of prejudicing investigation 37
2.8.1 Offences of prejudicing investigation under s 342 POCA 2002 37
2.8.2 Exemptions under s 342 POCA 2002 37
2.9 Civil action for breach of contract 38
2.10 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) 41
2.10.1 A risk-based approach to AML 41
2.10.2 MLR 2017-risk assessments 42
2.10.3 MLR 2017-CDD 43
2.10.3.1 CDD requirements 44
2.10.3.2 Verification 46
2.10.3.3 Beneficial ownership information 46
2.10.4 Enhanced customer due diligence (EDD) 47
2.10.5 Simplified customer due diligence (SDD) 48
2.10.6 Ongoing monitoring 49
2.10.7 Reliance 49
2.10.8 Policies, controls, and procedures 50
2.10.8.1 AML policies and procedures 50
2.10.8.2 MLROs 50
2.10.8.3 AML training 51
2.11 Solicitors Regulation Authority 52
2.11.1 SRA Handbook 2011 52
2.11.1.1 SRA authorisation and practising requirements 52
2.11.1.2 The SRA Principles 2011 and the SRA Code of Conduct 2011 54
2.11.1.3 SRA Accounts Rules 2011 55
2.11.2 AML supervision by the SRA 57
2.12 Enforcement 58
2.13 Concluding comments 58
3 Methodology 60
3.1 Introduction and research aims 60
3.2 Research strategy and research method 61
3.3 Purposive sampling 62
3.3.1 All participants selected from Top 50 UK law firms 63
3.3.2 Firm type within Top 50 law firms 63
3.3.3 Seniority and practice area 64
3.4 Ethics and reflexivity 64
3.4.1 Ethical considerations 64
3.4.2 Researcher reflexivity 65
3.5 Data collection 66
3.5.1 Interview preparation 66
3.5.2 Conducting the interviews 67
3.6 Data management 68
3.6.1 Transcription 68
3.6.2 Anonymity and confidentiality 68
3.7 Data analysis 69
3.8 Limitations of the research and quality criteria 70
3.8.1 Limitations of the research 70
3.8.2 Quality criteria 70
3.9 Concluding comments 70
4 The UK AML legislative framework 72
4.1 Introduction 72
4.2 POCA 2002 - the 'all crimes' approach 72
4.2.1 Background 72
4.2.2 The burden of POCA 2002 on the legal profession - 'Everybody's looking at nothing' 76
4.2.2.1 The lack of distinction between minor offences and serious crimes 76
4.2.2.2 The administrative burden of technical SARs 78
4.2.2.3 Transactional interruption 78
4.2.2.4 The NCA and technical SARs 79
4.2.2.5 POCA 2002 detracts from the aim of the legislation 80
4.2.2.6 The questionable intelligence value of 'technical' SARs/lack of feedback 81
4.2.2.7 'Real' versus 'technical' laundering 82
4.2.2.8 Non-compliance with POCA 2002/MLR 2017 as an AML firm-level risk 83
4.2.2.9 POCA 2002 'remainers' 83
4.2.3 How might exclusions from POCA 2002 be achieved in practice? 84
4.2.4 Law Commission Report on the SARs regime - June 2019 86
4.3 The inclusion of intent in the substantive money laundering offences 88
4.3.1 The intent element 88
4.3.2 Consequences of the inclusion of intent 89
4.4 Criminal sanctions and the Money Laundering Regulations 2017 90
4.4.1 Removing criminal sanctions from MLR 2007/2017 90
4.4.2 Retention of criminal sanctions in MLR 2007/2017 91
4.4.3 Do criminal sanctions make lawyers more cautious more generally? 92
4.5 Conclusion 93
5 The mechanical aspects of the UK AML regime 96
5.1 Introduction - customer due diligence (CDD) 96
5.2 Beneficial ownership 98
5.2.1 Beneficial ownership - the practical challenges 100
5.2.1.1 Beneficial ownership challenges in non-EU jurisdictions 101
5.2.1.2 Beneficial ownership challenges relating to trusts and private equity funds 101
5.2.1.2.1 Trusts 102
5.2.1.2.2 Private equity funds 102
5.2.1.3 The prohibitive costs of beneficial ownership requirements 103
5.2.1.4 The beneficial ownership threshold of 25% and the importance of 'control' 104
5.2.2 Register of people with significant control 105
5.2.3 Vulnerabilities in the UK beneficial ownership requirements 106
5.2.3.1 Beneficial ownership changes constantly 106
5.2.3.2 Complicit launderers will make false declarations on the PSC Register 107
5.2.3.3 Company formation 107
5.2.3.4 Lack of transparency 109
5.2.4 Concluding comments on beneficial ownership 110
5.3 Simplified due diligence 111
5.3.1 The administrative burden of equivalence 112
5.3.2 A holistic approach to SDD 113
5.3.3 Concluding comments on SDD and equivalence 114
5.4 Politically exposed persons (PEPs) 115
5.4.1 The definition of PEPs and identifying PEPs 117
5.4.2 Should EDD apply automatically to PEPs? 118
5.4.3 What counts as EDD? 119
5.4.4 Including domestic PEPs in the PEP definition 120
5.4.5 Producing a list of PEPs 121
5.4.6 Concluding comments on PEPs 121
5.5 Source of funds 122
5.5.1 Establishing source of funds is challenging 123
5.5.2 Guidance on source of funds 125
5.5.3 Source of funds information is a judgment call 125
5.6 Source of wealth 126
5.6.1 Source of wealth information is challenging to obtain 126
5.6.2 The judgment call on source of wealth 127
5.6.3 Issues surrounding source of funds and source of wealth 128
5.6.3.1 The shifting parameters of source of funds/source of wealth information 128
5.6.3.2 Historical criminality and source of funds/wealth 129
5.6.3.3 Source of funds and third party funds 131
5.6.4 Concluding comments on source of funds/source of wealth 132
5.7 Reliance 133
5.7.1 Reliance on third parties 133
5.7.2 Reliance on law firms by third parties 134
5.7.3 Concluding comments on reliance 135
5.8 Ongoing monitoring 136
5.9 AML training 137
5.9.1 Delivery of AML training 137
5.9.2 The importance of AML training, education, and awareness 138
5.9.3 Lmprovements to training - bespoke training and relevant examples 139
5.9.4 Concluding comments on AML training 140
5.10 The client account and money laundering 140
5.10.1 Clients attempting to use the client account as a banking facility 142
5.10.2 Solicitors no longer holding client accounts 144
5.10.2.1 The absence of a client account makes no or minimal difference to money laundering risk 144
5.10.2.2 Lack of client account makes transactions more cumbersome 146
5.10.2.3 Lack of client account shifts money laundering risks elsewhere 146
5.10.3 Pooled client accounts no longer qualifying for SDD 147
5.10.4 Concluding comments on the client account 150
5.11 Chapter summary 151
6 The suspicious activity reporting (SARs) regime 154
6.1 Background to the SARs regime 154
6.1.1 Decline in number of legal sector SARs 157
6.1.2 Poor quality legal sector SARs 160
6.2 Participants' experience of the SARs regime 162
6.2.1 Excluding minor offences and regulatory breaches from the ambit of POCA 2002 162
6.2.2 The meaning of suspicion 163
6.2.2.1 Suspicion as instinct 165
6.2.2.2 The fact pattern of each transaction 165
6.2.2.3 The interplay between suspicion and experience 167
6.2.2.4 The implications of the meaning of suspicion 168
6.2.3 The crucial role of the MLRO 169
6.2.3.1 Wholesale transference of money laundering concerns to the MLRO 169
6.2.3.2 The implications of wholesale transference of money laundering concerns 171
6.2.4 Defensive reporting within the SARs regime 172
6.2.5 The lack of intelligence value of SARs 173
6.2.6 Legal professional privilege and privileged circumstances 174
6.2.7 Lack of feedback and analysis of SARs/information sharing 175
6.2.8 A bespoke SARs form for the legal profession 182
6.3 The consent regime 185
6.3.1 Dealings with the NCA DAML/consent team 187
6.3.2 Deal pressure and the consent regime 190
6.3.3 The client relationship and tipping off 191
6.4 Concluding comments on the SARs regime 192
7 Participants' perceptions of the UK AML regime 198
7.1 The role of the legal profession within the UK AML regime 198
7.1.1 General comments on the AML role of the legal profession 199
7.1.2 The role of the legal profession is appropriate 200
7.1.3 Lawyers as unpaid investigators 201
7.1.4 The maturity of the AML regime 202
7.1.5 Poor evidence of money laundering via the legal profession 203
7.1.6 The pragmatic view - 'good' launderers will never be caught 205
7.1.7 Concluding comments on the role of the legal profession 205
7.2 The costs and benefits of AML compliance 206
7.2.1 The cost of AML compliance 206
7.2.1.1 Background 206
7.2.1.2 Participants' views on compliance costs 208
7.2.2 The benefits of AML compliance to lawyers and their firms 208
7.2.2.1 Managing reputational risk 208
7.2.2.2 Identifying and understanding the client risk profile 210
7.2.2.3 Collateral benefits of CDD 210
7.2.2.4 Creating a 'clean' corporate culture 211
7.2.3 Concluding comments on the cost and benefits of AML compliance 212
7.3 SRA supervision and enforcement of the UK AML regime 213
7.3.1 SRA AML supervision of the legal profession 213
7.3.2 Enforcement of the AML regime within the legal sector 214
7.3.3 Concluding comments on SRA AML supervision and enforcement 216
7.4 Assessment of money laundering risk 218
7.4.1 Firm level money laundering risks 219
7.4.1.1 Jurisdictional risks 219
7.4.1.2 Risks relating to particular clients - new clients, PEPs and wealthy individuals 221
7.4.1.3 Source of funds or wealth risk 222
7.4.1.4 Deal risk 223
7.4.1.5 The breadth of POCA 2002 223
7.4.1.6 Practice area risks 224
7.4.2 Classification of money laundering risk at a firm level 225
7.4.3 Concluding comments on identification of risk 227
7.5 UK law firms in a global context 229
7.5.1 Are UK law firms at a competitive disadvantage internationally? 229
7.5.2 Concluding comments on competitive disadvantage 230
7.6 Chapter summary 231
8 Conclusion 233
8.1 The UK AML legislative regime 234
8.2 The mechanical aspects of the regime 235
8.2.1 Beneficial ownership 236
8.2.2 Simplified due diligence, PEPs, and source of funds/wealth 237
8.2.3 Reliance and ongoing monitoring 238
8.2.4 AML training 238
8.2.5 Client account 238
8.3 The SARs regime 239
8.4 Perceptions of the regime 241
8.4.1 The role of the legal profession within the AML regime 242
8.4.2 Costs and benefits of compliance, SRA AML supervision, and enforcement 242
8.4.3 Assessment of money laundering risks 243
8.4.4 Top 50 UK law firms in a global context 244
8.5 Concluding remarks 244
Bibliography 247
Index 258
