Ignore red flags at your peril
Following recent case law developments and regulatory guidance, Michelle Garlick and Stella Duncan explain why money laundering ought to be a key risk area for law firms
In what is the first authority to consider the liability of both a seller's and buyer's solicitor on either side of a property fraud for loss suffered by the buyer, the High Court
in Purrunsing v A'Court & Co
(a firm) & Anor  EWHC 789 (Ch) has established grounds for a potential exposure in circumstances where it is well established that a seller's solicitor does not normally owe a duty of care to a purchaser.
This will no doubt resonate across the profession, in particular for conveyancing practitioners, who are already seeing increased levels of fraudulent activity in their practice area. The case concerned the purported sale
of a property in Wimbledon
by a fraudster who claimed to be its registered owner. By the time the fraud was discovered, the purchase money had been paid to an account in Dubai and was never recovered.
The claimant (purchaser) sought damages from the registered conveyancer retained by him to act on his purchase, House Owners Conveyancers Limited (HOC), and the solicitors' firm that unwittingly acted for the fraudster, A'Court & Co (ACC). Both HOC and ACC admitted that the purchase money had been paid away in breach of trust. The point of interest, so far as ACC was concerned, was whether it should be granted relief
under section 61 of the
Trustee Act 1925.
The court found that ACC
had failed to perform its anti-money laundering obligations in accordance
with reasonable practice in the circumstances and that failure had increased the loss by fraud. In the circumstances, ACC had not acted reasonably and was not entitled to the benefit of section 61.
At first glance one might
have some sympathy with ACC. They made enquiries regarding the identity of the seller and obtained recent utility bills
and bank statements. They inspected what they believed
to be his original British passport, although it turned
out to be a forgery. However, there were other 'red flag' warning signs:
The property was unoccupied;
The property was unencumbered;
The property was of comparatively high value;
The seller was pressing
for an expedited sale;
The seller had not supplied any evidence to ACC that showed a link between
him and the property; and
The address given by the seller was not either of
the addresses for service that appeared on the proprietorship register.
The court clearly took the view that those factors were sufficient to warrant further enquiries, including, in particular, whether the seller was actually the owner of the property that he was purporting to sell, and that ACC's failure
to make those enquiries was enough to attract a liability.
The Solicitors Regulation Authority's (SRA) recent report on its thematic review into anti-money laundering (AML) warned against complacency
in this key risk area.
Key points covered in the report included client due diligence and AML training
and awareness. It identified weaknesses in applying enhanced due diligence, insufficient knowledge and understanding of how to establish and differentiate between the source of funds and source of wealth, and insufficient supporting documentation being obtained.
There are several lessons that can be learned from this case and the SRA report:
Ensure that client take-on procedures are robust
Ensure fee earners receive proper training to recognise red flag risks. The SRA report recommended that regular refresher training on AML should be delivered and testing undertaken to ensure that training is understood;
Consider the particular transaction in the round
and think about what is really going on; and
Don't treat due diligence
as a tick box exercise.
Make appropriate enquiries according to the individual risks.
Compliance officers for legal practice and money-laundering reporting officers need to take stock of, objectively review,
and test their procedures.
Does your firm fall within
the good or poor practices identified by the SRA? What
can be improved? Putting
this off to another day is not