Keeping the property department on its toes

Lest anyone should still be under any illusions, it is an undeniable fact that the prevention of money laundering, and the risk associated with the often overlapping topic of terrorist financing, is of great national concern.
It is also an undeniable truth that these are issues which must be addressed by solicitors and others working in a law firm.

We have rigorous legislation and, running alongside this, strict regulatory requirements designed to ensure that the legal profession plays
a role in the deterrence of money laundering and terrorist-financing crime. Neither the law nor the regulation tolerates ignorance, stupidity, naivety,
or, of course, downright dishonesty when it comes to these topics.

The threat that a firm will be used by criminals
for these purposes is real and must be addressed
in compliance and risk management planning.
The Solicitors Regulation Authority (SRA) demands that individuals demonstrate knowledge of the legislation, and that firms undertake an analysis of the risks present in their environment, with an appropriate risk response.

Poor money-laundering controls, in the form of inadequate systems and controls over the transfer of money, are included in the SRA's latest 'Risk Outlook' report (incidentally, a very useful resource for compliance practitioners in that it provides a 'top ten' list of risks which really matter to the regulator).

This means that not being able to
demonstrate the correct response can have
serious consequences. We are not only concerned with the criminal offences which can be committed by an individual, but also with the issue of disciplinary censure and consideration of the appropriateness of the firm's continuing authorisation by the SRA; reputational issues;
civil action by wronged parties; and so on.

High-risk arena

Property work attracts more than its fair share of risks when we think about criminals targeting lawyers and firms. As the SRA says on its website: 'Property transactions are particularly attractive to money launderers as they can legitimise a large amount of money in one go. Money tied up in property can also be a way for people who have
had their bank accounts frozen to preserve access
to funds.'

What needs to be done to ensure there is a robust but proportionate response to these and other similar risks in the property department? Fortunately, there is nothing particularly novel in the science of money laundering, so a good starting point is awareness of the law, offences, and defences. What does change, however, is criminal methodologies. The successful launderer has to be innovative to stay one step ahead. The development in cyber criminality is just one example of criminals in 'change champion' mode.

As a result, solicitors and their colleagues
must both understand the need to comply with
the nationally applied legislation in this area and
be aware of the ever-changing tactics of those hunting out vulnerable targets. Everyone needs
to be familiar with the Proceeds of Crime
Act 2002, the Terrorism Act 2000, and related legislation. These apply to us because at one level we live within the UK and must comply with the national laws, and also they must be applied by
us in respect of our business dealings. Failure to
comply can lead to criminal offences being committed. In addition, the property department, because of the transactions which are performed, must comply with the Money Laundering Regulations 2007 so that client due diligence is undertaken, records kept, and training given, among other requirements.

Everyone working in the property department will need to understand their specific duties.
This must be supported by proper processes, audit trails, and the mechanisms to ensure the firm's money laundering reporting officer
(MLRO) is able to discharge their duties to
make suspicious activity reports where necessary.

Sadly, this is just one element of the risk picture for property lawyers, who must sometimes feel they are under the cosh when it comes to working in a high-risk arena. In addition to the threat of being easy targets for money launderers, this department also has to be alert to the possibility of mortgage, property, and identity fraud, particularly now that we are dealing with IT-inspired cybercrime and work in an environment where it is all too easy for technology to be used for criminal purposes.

Disciplinary action

The SRA expects robustness. Its views are demonstrated in the variety of risk resources and warning notices which the regulator has published lately.

Disciplinary action is also indicative of the regulator's intolerance of a lax response to the risks. Consider the case of SRA v Henry (Solicitors Disciplinary Tribunal decision 1132-2014, 12 June 2015). The summary of the case, as reported on the Law Society website, is as follows: 'The respondent failed adequately, or at all, to carry out personal identity checks and the required anti-money-laundering checks on a client,
in breach of principles 6, 8, and 10 of the SRA Principles 2011 and regulations 5, 7, 8, and 9
of the Money Laundering Regulations 2007.

'The respondent created and improperly signed a false letter of authority purporting the same to have been signed by her clients and in doing so had been dishonest. The respondent also permitted or acquiesced in money being paid into and out of the firm's client account when there was no underlying legal transaction.

'Sanction: The tribunal found that the respondent had failed to comply with the Money Laundering Regulations by ignoring clear indicators of suspicious behaviour and not carrying out due diligence investigations regarding third parties. The tribunal believed that this showed a reckless disregard of the money laundering obligations whether or not the respondent was truly unaware of the classic indicators of mortgage fraud and money laundering.

'The respondent was struck off the roll of solicitors and ordered to pay costs of £23,500.'

Robust response

Demonstrating the right response to money laundering, and to property-related frauds more widely, delivers some clear and powerful messages. To the criminal, and the criminal's associates, it is the message not to bother to attempt to use the firm for improper purposes;
to the SRA and other bodies with a public interest motivation for being concerned about the firm,
it is the message that the firm takes a sensible approach to the risks; and finally to colleagues, and prospective new members of the firm, it is
the message that vigilance, compliance, and displaying the right values and behaviours
is non-negotiable.

Ways to ensure this is demonstrated in the property department include the following:

• ?Never assume you are safe from falling victim to a launderer or fraudster. Criminals are constantly looking for new ways to catch lawyers off guard. Remember that we add a layer of respectability to a scam, and also that we can do technical things (such as conveyancing) which they can’t;
• Ensure someone is tasked with keeping up to date with developments in the laundering and fraud world, so that news of new scams is circulated to the whole team;
• Make sure training is regular and effective. The ‘same old, same old’ programmes rolled out every year are rarely productive, but a combination of different training techniques will at least retain the audience’s interest;
• Training should not be treated as a once-a-year event. A holistic approach is more effective, and training delivered without the title will also improve vigilance, so, for example, think about sending ‘round robins’ with scary anecdotes about the consequences of turning a blind eye, or articles about latest scams and the risks of allowing the client account to be used as a banking facility;
• Create a culture where compliance is seen as a characteristic which is expected of everyone within the team and, more widely, within the business;
• A compliance culture will be successfully implemented if the values of openness and accountability (as opposed to blame and shame) are promoted. Everyone plays a role in keeping themselves and the business safe, and the message should be not to take chances and to discuss concerns in a timely manner; and
• Ensure everyone knows the identity of the MLRO and that the process by which the MLRO wants to be advised about suspicions (preferably in a documented audit trail) is made clear. In addition, make compliance and communication of concerns to the compliance officers for legal practice and finance and administration (COLP and COFA) a routine occurrence. Joined-up thinking about risk pays dividends. SJ

An extended version of this article first appeared in Commercial Property Practice: An Expert Guide

Tracey Calvert is the director of Oakalls Consultancy Limited