Risky clients: The practicalities of reporting on clients

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Four things you will learn from this Masterclass:

1. How to ensure fee earners monitor potentially suspicious activity

2. How to decide whether to report on suspected money laundering 

3. How to make a good quality report to the National Crime Agency

4. How to obtain NCA consent to continue to act for a client

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Regardless of the size of the legal practice in which you operate, the challenges posed by the reporting obligations in the Proceeds of Crime Act 2002 (POCA) remain significant. Money laundering reporting officers (MLROs) in the UK are faced with competing demands of client care, compliance and legal privilege, as well as very real commercial issues. Explaining to the managing partner that you need to report the practice’s best client to the National Crime Agency (NCA) will require nerves of steel. This article aims to provide practical advice on how to deal with those competing demands.

Regulatory developments

The Solicitors Regulation Authority (SRA) stated in its July 2013 Risk Outlook that the level of suspicious activity reports (SARs) was lower than it would expect. Its updated Risk Outlook of March 2014 identified money laundering as a serious and increasing risk.

With the prospect of the Fourth Money Laundering Directive being adopted in late 2014, revised money launching regulations (and potentially changes to the legislation) coming in late 2015 and the Financial Action Task Force (FATF) Mutual Evaluation Review of the UK due in spring 2016, it is timely to consider how effective your systems are and whether your fee earners have perhaps become a little complacent about their reporting obligations.

Fee earners need to stay alert throughout the transaction and monitor whether it is consistent with the risk profile of the client. The challenge with source of funds is real; if you do not understand (and evidence) where the money is coming from, how will you protect yourself and the legal practice from allegations of money laundering
or ‘failure to report’? Make sure your fee earners discuss their concerns with the MLRO at the earliest opportunity.

The law is onerous and requires the reporting of matters which are unlikely to result in action (e.g. savings from regulatory offences, such as failure to renew registration with the Information Commissioner). When you decide to report, you should do so because there is a legal obligation, not to satisfy a ‘numbers game’ or on a defensive basis. As demonstrated in Shah v HSBC [2012] EWHC 1283 QB, MLROs should think carefully about why they are suspicious (or not), document their thought processes and come to their own independent decision.

Let’s consider the challenges facing MLROs, what constitutes good quality reports and how to provide the NCA with the information it needs. This, in turn, will help with obtaining its consent quickly to undertake a prohibited act.

Deciding to report

Following the firm’s recent training on the red flags contained in the June 2013 FATF report Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, Jane Smith asks her MLRO for guidance, as she is concerned about the source of funds for a property purchase. Jane had been surprised to discover that the large sum deposit would be provided by the client’s 19-year-old nephew. The MLRO agrees that this does seem unusual.

The MLRO advises Jane to seek more information, including identity documents for the nephew and details of the amount and source of funds. The client’s response does not make sense and the nephew appears extremely reluctant to provide identification. The uncle makes
it clear that he wants the firm to proceed and is irritated that the fee earner is asking so many questions. He withdraws instructions. The MLRO has to decide whether to report the matter to the NCA.

The checklists below highlight the key stages of the decision making and reporting process for MLROs.
Note, however, that they are not a substitute for considering the stages in detail by following the flowcharts in the Law Society’s Anti-money Laundering Practice Note and annex 6D of its 2012 Anti Money Laundering Toolkit.

When should you report (s.328)?

1. Do you know or suspect that a retainer relates to criminal property?

2. Do you suspect an offence under s328?

3. If you suspect an offence under s328, does the retainer involve litigation, dispute resolution, etc?

4. If so, is it sham litigation?

5. If it is not a sham, you may not commit an offence under s.328 but your client may need advice about acquiring criminal property under s.329.

6. If the retainer does not involve litigation, has an arrangement been entered into or are you becoming concerned in an arrangement?

7. If so, do you suspect it facilitates the acquisition, retention, use or control of criminal property?

8. If so, is the information on which your suspicion is based covered by legal professional privilege?

9. If so, document your decision and the reasons for not reporting.

10. If not, is there a reasonable excuse for not making a report?

11. If there is, document your reasons.

12. If not, make a report to the NCA, as a defence to the offence, seeking consent to undertake the prohibited act.

Although there has been no transaction, you will consider whether to make a report under the ‘failure to report’ offence. You should think through the process logically. Obviously, for there to be money laundering, there has to be criminal property or an irresistible inference
(see Ahmad v HMA [2009] HCJAC 60) before there is a need to report.

If there is attempted fraud, there is no money laundering, but you can report to Action Fraud (www.actionfraud.police.uk). If someone appears on the HM Treasury sanctions list, there is not necessarily any money laundering, but you will need a licence from the Treasury before you send or receive money from such a person.

Even if you suspect someone is engaged in money laundering, you
need to know the identity of the person
or the whereabouts of the criminal property or have information that will
help law enforcement to identify the launderer or property before you are required to report.

When should you report (s.330)?

1. Do you know or suspect someone is engaged in money laundering?

2. If not, do you have reasonable grounds to know or suspect

   someone is engaged in money laundering?

3. Did you receive the information on which your suspicion is based in the course of business in the regulated sector?

4. If not, no report is required under s330.

5. If so, is the information on which your suspicion is based covered by legal professional privilege?

6. If so, consider 10 to 12 below, document your decision and the reasons for not reporting.

7. If not, is there any other reasonable excuse for not making a report?

8. If so, document your reasons.

9. If not, was the information received in privileged circumstances?

10. If so, has it lost its privileged or LPP status due to disclosure, or is the client prepared to waive privilege? (See p.130 of the practice note)

11. If not, do you have prima facie evidence of being used as an instrument of fraud?

12. If not, the information is protected, and you do not commit an offence if you do not report, but you may decide to withdraw from acting.

13. If the information was received in privileged circumstances but the client has waived privilege, the information has lost its privileged status due to disclosure, or you have prima facie evidence of being used as an instrument of fraud, you will need to make a report to the NCA.

Before you report, you should review the information available and start drafting your reason for suspicion, which will help you to analyse why you are reporting and whether you require further information.

The analysis

• Think through the decision to report logically.

• What is the criminal conduct (bearing in mind the wide range of criminal offences, particularly the regulatory offences)?

• What is the criminal property?

• Consider R v Da Silva [2006] EWCA Crim 1654 – ask the client questions if you have a concern.

• Do you have a ‘genuinely held’ suspicion? (Remember Mr Wigley in Shah v HSBC [2012] EWHC 1283 (QB))

• You may decide, due to the analysis, that you do not have a suspicion. If so, document why you are not reporting to protect yourself and the practice.

• If you are suspicious, consider the ‘reasonable excuse’ defence. Paragraph 5.5.1 of the practice note suggests that, if your knowledge or suspicion is based on privileged information and legal professional privilege (LPP) is not excluded by
  the crime/fraud exception, you will have a reasonable excuse for not making an authorised disclosure under section 338.

• Assess whether LPP applies by considering chapter 6 of the practice note and whether the communication falls under advice privilege or litigation privilege. For example, a bill of costs and statement of account are subject to advice privilege, but conveyancing documents are not communications and not subject to advice privilege. Litigation privilege is considered at paragraph 6.4.3.

• Before you decide that LPP does not apply, consider paragraphs 6.4.4 and 6.4.5 of the practice note, particularly in relation to the crime/fraud exception. Are you satisfied that there is prima facie evidence the practice is being used as an instrument of fraud?
  It is not enough for law enforcement
  to allege that the practice has evidence.

Making the report

Having considered all of the above issues, your MLRO decides to report. She is registered with the NCA’s SAR Online System, so is familiar with the process. However, each report is different and presents a new challenge. As there is no longer a Limited Intelligence Value report, she must make a SAR even if law enforcement is already involved.

The NCA has provided guidance on obtaining consent to undertake an activity which is suspected to constitute one of the three money laundering offences (sections 327-329 of POCA). It has also provided guidance on how to submit a SAR. A good report is structured in a logical format and includes all relevant information, a brief summary of your MLRO’s suspicion and a chronological sequence of events. It is clear, concise and simple.

The NCA’s five key elements to include in a SAR are:

1. reporter’s suspicion of money laundering;

2. nature of the prohibited act;

3. value/whereabouts of criminal property;

4. identity of the subject; and

5. if (3) or (4) are not known, enough information to identify the subject or the property.

In its Annual Report 2013, the NCA noted that a significant number of reports failed to include the five key elements.
In several cases, when trying to obtain
the missing information, the NCA found that the MLRO had gone on holiday without providing any contact details,
even those of a deputy. This led to considerable delays in obtaining consent.

The key to a good report is the ‘reason for suspicion’, which explains in non-legal language:

• the background to the matter;

• who is involved;

• what is the offence;

• the identify the criminal property;

• what the prohibited act is;

• why you are suspicious; and

• the next steps and timescales/urgency.

It is important to think about who, what, why, when, where and how. Only report confidential information; do not report privileged information.

If your MLRO makes a good quality SAR containing all of the relevant information, she is more likely to obtain consent quickly. Consent will only be provided to the extent that it is sought, so it is important to set out clearly what consent is wanted for and the next stage. Having drafted the reason for suspicion, the MLRO will then check it with the
fee earner to ensure she has all of the key points.

Post-reporting challenges

MLROs are familiar with the consent regime and the timescales. If law enforcement are interested in the
suspect, consent will take longer, as,
for example, they will consider whether
to seek a restraint order. If the money
is moving within the UK, it is easier to trace, but if the money is being sent to another country, it will be harder to
track, so a refusal and a restraint order
is more likely.

If consent is not received within the usual three-day response time, your MLRO should contact the NCA because, although it cannot give advice, it may
be able to provide some indication as to the likely timescale. This may help to handle internal as well as external challenges.

Different situations present different problems. If the report is made on behalf of your client, your MLRO can explain
the restrictions about undertaking any further activity. She may still have challenges with the other side and will consider the ‘tipping off’ offence if the work is in the regulated sector. If your
firm is outside the regulated sector, she will consider the ‘prejudicing an investigation’ offence.

If your MLRO has reported your client, the challenges are different. She must not ‘tip off’ or prejudice any investigation whilst awaiting consent. Legal practices are less likely to report their clients without their knowledge and whilst continuing to act, primarily because that situation raises so many ethical challenges.

If your firm is in this situation and the client raises concerns about delays, your MLRO should contact the NCA’s consent helpdesk on (020) 7238 8282 and discuss the particular issues, as they may be able to help in terms of what your firm can say to the client. She should also keep the NCA informed, particularly if timescales change or new information comes to light. This may help to speed up the decision.

Waiting game

Reporting and seeking consent is a nerve-wracking experience in terms of handling the internal issues around whether you will receive consent and, if not, how you will handle a refusal.

Although there are times when consent is refused, the reality is that it is
a small percentage. The NCA’s SAR Annual Report 2013 stated that,
of 14,000 consent requests, 1,387 were refused in the period October 2012 to September 2013; 266 were subsequently granted in the moratorium period.

A good-quality report with all of the relevant information will help you to obtain consent quickly. It is important to provide the contact details of both the MLRO
and deputy in case the NCA requires more information; the deputy should also be properly briefed if the MLRO plans
to go on holiday after submitting a report.

Confidentiality breaches

Understandably, legal practices will be concerned about safety issues and possible misuse of SARs. Due to such concerns, the Home Office, with assistance from the Law Society, has produced the Home Office Circular 53/2005 Money Laundering: The Confidentiality and Sensitivity of SARs and the Identity of Those Who Make Them.

The NCA’s annual report explains what action has been taken to ensure compliance with the circular and refers
to the dedicated hotline (0800 234 6657) for reporters to raise concerns about the inappropriate use of SARs. Training has been provided to relevant staff so that they understand the importance of maintaining confidentiality, the duty of care to reporters and how SAR material can be used. Action is taken if there is any breach, even if there is no risk to the reporter.

If your MLRO feels threatened, she should call the police, but also ensure that the Law Society is aware of the circumstances. The consent regime can only operate effectively if all of those involved are confident, particularly about the safety issues.

A logical approach

Making reports will always be challenging. Reporting presents competing demands but, if your MLRO takes a logical approach, ensures that she trains your staff, stays calm, submits a good quality report and is familiar with the NCA’s guidance and the practice note, she should be able to comply with the legal requirements and protect herself and
the practice.

Alison Matthews is a specialist in all aspects of law firm regulation and compliance, with over 22 years’ combined experience at a top-10 law firm and the Solicitors Regulation Authority (https://alisonmatthewsconsulting.co.uk). She is author of the Law Society’s
Anti-Money Laundering Toolkit.