Quarterly AML Regulatory Updates for Law Firms – January 2022
As we kick-start 2022, law firm owners, leaders and compliance officers must be aware of a growing number of considerations relating to anti-money laundering (AML).
It is the responsibility of every person that works for a law firm to make sure that the business is not used for money laundering, and that relevant reports are made of any suspicious activity.
Our quarterly AML updates webinar and blog series aims to keep law firms updated in a consistent, informative and accessible way so that they can include relevant developments in their AML training programmes and keep their processes and procedures on track.
Quarter One AML Regulatory Update
Our Jan 2022 AML Update webinar recording, is hosted by Brian Rogers, Regulatory Director at Access Legal. He is joined by Bill Jones, Financial Crime Specialist at Bill Jones Consultancy and former law firm managing partner and former Chair of Riliance Training.
This blog is a summary of what Brian Rogers and Bill Jones covered in this latest AML regulatory update webinar, with some examples of the very interesting Q&A that took place regarding the four anti-money laundering topics on the agenda:
- The SRA’s new Money Laundering Governance document and ‘Three Pillars of AML success’
- What should we do about Chinese Funds for property?
- What are law firms missing in terms of AML and Data Protection?
- Is it safe to rely on “Deemed” Defence for AML Offences?
- AML Update Q&A with Brian Rogers and Bill Jones
SRA’s new Money Laundering Governance document
The Three Pillars of AML Success
Between April and September last year, the Solicitor’s Regulation Authority worked closely with 50 law firms, specifically with people responsible for anti-money laundering within those firms. With a view to providing practical guidance they surveyed the 50 with questionnaires and visited 25 of them for an in-depth review. On 22 November the SRA published their new Money Laundering Governance document, which includes learnings from this work. The report suggests the three pillars of success regarding anti-money laundering (AML) are: “Authority”, “Independence” and “Resources”.
Within the governance document, the SRA clearly spells out that in terms of the first pillar which is “Authority” the person heading up the AML compliance for any law firm should have the necessary authority, and be able to command respect from all colleagues, including the most senior people at the firm, to allow them to do the job effectively.
In terms of “Independence” the person in charge should have the ability to make decisions without being influenced by other fee earners at the firm.
In terms of “Resources” the person responsible for anti-money laundering at any law firm should be afforded sufficient time and space to allow them to always feel able to take the best course of action for the firm to keep it compliant with the AML regulations.
Brian and Bill share their observations on the SRA AML update
In the webinar, Brian and Bill highlighted a few of their observations regarding the SRA’s new Money Laundering Governance document, specifically relating to the three pillars:
- “Authority” - 18 out of 30 (60%) of the Money Laundering Regulation Officers spoken to by the SRA regarding “Authority”, reported they “used their free access to all of the firm’s management and business data to determine what the overall risk-based approach to money laundering would be”. There was some discussion around why the remaining 40% don’t feel they are able to do this.
- “Independence” – the report mentions that two MLCOs the SRA had spoken to said that their decisions could theoretically be outvoted by the rest of the firm’s management . The SRA strongly recommend that Money Laundering Officers at law firms should automatically have the last word on all AML matters. If a firm’s leaders need to question their MLCO’s (Money Laundering Compliance Officer’s) decisions, perhaps they ought to consider whether they have the right person in place and / or the right circumstances.
- “Resources” – According to the new Governance report, the biggest challenge that AML officers discussed the SRA was “Resources”. Most conversations were acutely in relation to time – time to learn the role, time to plan, time to check the firm’s progress, time to reflect, and time to act in an emergency. Of the 54 Money Laundering Officers (MLCO/MLROs) spoken to about “Resources”, the majority did not have any reduction in their fee earning targets to take account of their extra AML responsibilities.
One firm spoken to by the SRA for the report, however, has taken a stance that fee earning AML Officers should have their targets adjusted to take account of ‘chargeable’ and ‘accountable’ (i.e. non-billable time that benefits the firm in some way) time.
For example a Money Laundering Officer that enables the firm to avoid a significant fine, such as the £232,500 fine recently reported in the news levied on a London firm for AML breaches. The firm highlighted in the report that has adjusted targets for their MLROs, clearly recognises this would not be a bad return on investment!
Firms are clearly on notice as to what the SRA will be expecting from them going forward. Discussion during the webinar ensued around the consensus that firms need to take steps to adapt as soon as possible to the expectations around “the three pillars of success” as set out by the SRA.
Sign up now to access the AML Update webinar recording
What should we do about Chinese Funds for property?
There is a major lack of clarity for law firms around the reporting of property cases where funds originate from China. We understand the National Crime Agency is currently inundated with ‘suspicious activity reports (SARs) relating to this.
Law firms in the UK and globally find themselves part of a complex scenario because China has imposed foreign exchange restrictions (“CFER“) intended to prevent Chinese funds being used to purchase overseas properties. So for UK law firms, whilst it is not illegal to use UK funds to purchase property abroad, there is a concern that funds coming from China may be tarnished as the CFER may have been breached.
This has led to the matter becoming a political hot potato, because the Government quite understandably is not keen on dissuading Chinese investors from the UK. Our webinar presenters have put a significant amount of effort into seeking to gain clarity for our law firm webinar subscribers on this subject. Of course, the latest guidance from the NCA regarding Chinese Underground Banking and ‘Daigou’ is dated October 2019, and it is felt a more up-to-date statement is needed.
As a result of our presenters’ research, they have discovered that the National Crime Agency is planning to communicate their updated position in six to eight weeks’ time (i.e. circa early to mid-March 2022). Also, at a recent SRA Conference (Nov 2021), our presenter and regulatory director, Brian Rogers asked for a clear statement of the SRA’s position on Chinese funds and followed it up with an email asking them to confirm their answer in writing.
The answer Brian received at the conference as part of the Q&A, and the reply he received in writing were in some ways contradictory to one another. On raising this, the SRA have promised to come back to us to clarify their position as soon as possible. As soon as we hear back from either or both authorities we will advise all Access Legal webinar subscribers.
Brian Rogers, Access Legal’s Regulatory Director, and Bill Jones, Financial Crime Specialist Consultant, go into this in some detail regarding Chinese funds for property during the Webinar.
At the end of the webinar, the presenters received a number of questions about Chinese funds. We have selected some of them to share at the end of this blog, and you can see the latest guidance issued by the National Crime Agency.
If you are not already subscribed to Access Legal webinars and you are a law firm employee, we invite you to do so: Access Legal Compliance Webinar Clinics.
What are law firms missing in terms of AML and Data Protection?
There is something very specific Money Laundering Officers (MLROs and MLCOs) must be aware of, and they should also make sure all law firm staff are aware of too – with regard to AML and data protection. We are seeing evidence that S.41 is being missed. Firms tend to have focused really heavily on GDPR, quite rightly so. However, there is a little more to consider for anti-money laundering. Clause S.41 of the Money Laundering Regulations 2017 says that “before establishing a business relationship or entering into an occasional transaction with a new client firms MUST provide the client with a statement clearing stating that:
‘Any personal data received from the client in order to comply with the Regulations will only be processed for the purpose of preventing money laundering or terrorist financing unless such processing is permitted by law or the client consents to any alternative use of the data.’
Of course anywhere we see the word MUST in our regulations it means you are breaking the law if you do not.
Bill Jones suggested that existing data protection policies, privacy statements and terms of business can easily be tweaked to incorporate this statement. And he warned that without it, the SRA may pick this up as a breach in a future audit.
Is it safe to rely on a “deemed” defence to money laundering offences?
Technically, yet is safe to rely on a “deemed” defence to money laundering offences. Silence from the NCA gives law firms a defence. But there are a few key points to take into consideration. The Proceeds of Crime Act 2002 (Sections 327,328 and 329) provide the deemed defence.
When the NCA does respond it provides written consent to proceed known as a DAML or Defence Against Money Laundering. Otherwise it will issue a refusal. The above clauses says that no offence is committed where “Authorised Disclosure” is made and the NCA does not respond with a DAML after:
- Notice period – seven working days
- Moratorium period 31 days (not working days) after a notice of refusal has been provided.
Key considerations
- You should submit via the online portal
But you should submit your “authorised disclosure” via a SAR (Suspicious Activity Report) and do it via the National Crime Agency’s online portal, so that you have evidence you can rely upon that it has been submitted and received. Avoid sending SARs in the post. - If there is silence
335(2) says that a person must be treated as having appropriate consent if before the end of the Notice Period (or if applicable after the expiration of the moratorium period) no notice of refusal to provide consent is received from the NCA. - The same level of protection with a “deemed defence”
A “Deemed Defence” therefore provides the same level of protection as a written DAML but it is also subject to the same conditions as those set out in the standard DAML letter issued by the NCA.
Worth noting however, because the DAML has so many caveats (and a deemed defence is subject to the same conditions) many lawyers question whether it is actually a defence at all.
This is important for all firms, but particularly for law firms dealing with Chinese funds.
Q&A from the Access Legal AML Webinar for Law Firms – January 2022
We have selected a range of questions asked at the webinar and how the presenters responded to them with their views.
Please note that the answers below represent the views of our webinar presenters only and should not be taken as legal advice. It is of course the personal responsibility of all solicitors to ensure that they comply with the Money Laundering Regulations and the relevant ant-money laundering statutory provisions.
Q1: Should funds originating from Hong Kong be dealt with in the same way as funds from China?
Answer: No. Hong Kong has a different legislative regime. However, if funds are moved from China into Hong Kong with a view to getting around the Chinese regulations, then yes.
Q2: If funds are gifted to a client, from a Chinese relative, and source of funds and CDD evidence the funds prove are from a legitimate source, is it our obligation to obtain confirmation that the Chinese pledge has been satisfied before proceeding?
Answer: The Chinese pledge must have been inaccurate/misleading if the ultimate aim is to use the funds to buy property in the UK. It doesn’t matter whether funds are pooled by relatives. In other words the client will not be able to confirm that the pledge has been satisfied.
Q3: Would asking for confirmation that funds have come from a legitimate source constitute tipping off?
Answer: No. You are allowed to ask clients questions in order to satisfy yourself of their source of funds/wealth.
Q4: Is it reasonable to expect solicitors to know about all currency export restrictions operated around the world?
Answer: Generally, no. However, it may be seen as reasonable for a firm to understand whether such restrictions apply where a firm specialises in international transactions or has a small number of clients operating out of a small number of countries. A firm should make an assessment when completing its practice wide risk assessment.
Q5: Do the FOREX (Foreign Exchange) regulations apply to Macau also?
Answer: No. Macau, like Hong Kong, operates under a different legislative framework from China and therefore does not fall under the same restrictions.
Q6: What if a Chinese client has a British passport?
Answer: If the client is also a Chinese citizen and the funds being used originate from China, then the rules still apply.
Q7: Does property relate purely to commercial or residential real estate or does it relate to shares etc?
Answer: China’s foreign exchange policy explicitly states that the purchase of foreign exchange shall not be used for overseas housing, securities investment, the purchase of life insurance and other capital projects that have not been opened yet.
Q8: Can we use money converted from Crypto currency to purchase property?
Answer: It depends where the money used to invest in crypto currency originated from, so you would need to carry out appropriate checks to ascertain this.
Q9: Moving away from Chinese funds - how about Russian Funds and Ukrainian monies?
Answer: You would need to apply risk-based due diligence on the funds. Funds coming from Russia should be regarded as higher risk and appropriate enhanced due diligence would be required. Depending on how the situation develops, economic sanctions may be applied so you would need to check whether any sanctions are in force.
Q10: Can we rely on a third-party’s check on source of funds such as an accountant reference of credibility etc?
Answer: The Money Laundering Regulations do allow for ‘reliance’ on third parties, but you need to have a written agreement in place with the third-party to allow for this; it should be noted that you would still remain liable for any errors or omissions made by the third-party. However, the reliance provisions only extend to the ID verification requirements under the Regulations and not source of funds. Adopting a risk-based approach source of funding enquiries could include obtaining confirmatory evidence from accountants.
Q11: A bit of an awkward one: how do we deal with funds received from OnlyFans monies; are they legitimate?
Answer: Onlyfans is an internet content subscription service based in London. Content creators can earn money from users who subscribe to their content—the "fans". It allows content creators to receive funding directly from their fans on a monthly basis as well as one-time tips and the pay-per-view (PPV) feature. The website has two million content creators and 130 million users. The issue here is that sex workers use the site to promote their services, which is where there is a risk that funds could be the proceeds of crime; you would need to carry out appropriate checks and if necessary request a defence.
Q12: If funds come from a regulated firm of accountants in the UK from their client in Nigeria is it necessary to do any further AML checks?
Answer: See answer to question 10 above.
Q13: Do you believe that the SRA no longer wants law firms to deal with clients purchasing from overseas? Are many firms simply no longer dealing with overseas clients?
Answer: We cannot speak on behalf of the SRA. It is for individual firms to make an appropriate risk assessment on which clients they may want to deal with (subject to discrimination laws), and if they feel overseas clients are too high risk, make an appropriate decision in this regard.
Q14: How do you know if the property has been gained from criminal proceeds or activity?
Answer: As part of your client due diligence checks you need to ask appropriate questions based on the risks presented, if any, to satisfy yourself that the property does not derive from criminal activity. Check out the “Warning Signs” highlighted on the SRA website.
Q15: Are there any parameters or guidelines that the NCA work to that determine whether they will issue a DAML or don't bother responding (deemed defence)?
Answer: All reports made to the NCA are reviewed and given appropriate focus and priority based on internal systems and procedures; these are not made public for obvious reasons. The NCA should only refuse a DAML if there is an intention to freeze or otherwise constrain the relevant property.
Q16: When acting on a sale where the purchase was handled by a different firm, but certain queries were raised about the circumstances of the purchase, would it be pertinent to ask further questions or accept the fact that due diligence should have been done by the purchasing solicitors?
Answer: There is no harm in discussing concerns you may have with solicitors acting within the same transaction if this helps to clarify matters; things can become more difficult if solicitors start asking for written assurances/guarantees around client due diligence. Prior to giving any assurances/guarantees firms may want to discuss matters with their insurers. If you have concerns about the funding of the purchase, you need to be satisfied that no criminal property is involved so you may have to ask the other solicitor questions.
Q17: Do you suggest we have to go back to where the clients bank statement shows a £0 balance, or can we take opening balances assuming similar activity say if we have gone through up to 2 years bank statement and it still has a high opening balance of say half of the amount of funds you are accepting?
Answer: It is for you to take reasonable steps to satisfy yourself that the funds are not the proceeds of crime, so it will be up to you as to how far you want to go back based on the risks presented.
Q18: If the client does not consent to a DAML, then are we allowed to just turn the client away, or does a DAML still need to be done even if the client is not consenting?
Answer: You are allowed to ask the client questions as part of your due diligence checks without running into tipping off difficulties, which can include advising the client not to do something that would be illegal, for example, not declaring income to HMRC. If you are not satisfied with the answers given or action taken by a client you can refuse to act for them; if this is the case you would not need a defence (DAML) as you are not pursuing matters, but you may decide it is appropriate to make a report to the NCA in any event because of your concerns.
More information on Access Legal webinars, compliance solutions and resources
Brian Rogers’, Regulatory Director of Access Legal, consistently attracts in excess of 1000 law firm execs to his quarterly update webinars. Brian is an expert on compliance and learning for law firms on a wide variety of topics of this nature. He built the Riliance Compliance system which was acquired by the Access Group in 2019 and is now an active member of the senior Access Legal Team.
The AML Update Webinar is a regular quarterly webinar provided by legal software and compliance solutions providers, Access Legal, who are part of The Access Group. If you would like to subscribe to future Access legal Webinars or view the recording of the January 2002 AML Update - both are open to anyone working at a law firm.
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