Would your AML practices make the SRA 'raise an eyebrow'?

In a speech on 7 September 2015, David Green QC, head of the Serious Fraud Office, signalled his intent to go after the ‘enablers’ of economic crime – the lawyers, accountants, and other advisers who are said to help criminals launder money. According to Donald Troon, director of the National Crime Agency, the problem is so widespread that house prices in London have been artificially driven up by overseas criminals who want to sequester their assets here in the UK.

Allegations that solicitors and estate agents are being used by money launderers to facilitate property purchases in London’s booming property market are nothing new. 

Critics, though, point to the poor quality and small number of suspicious activity reports (SARs) made in the property sector. Some 179 SARs were submitted by UK estate agents in 2014. Solicitors and other legal professionals made a total of 3,328 SARS during the same period (compared to over 11,000 in 2006/07). It is not clear if these were property related or not. ?In any event, these figures represent a tiny percentage of the total volume of transactions in London alone. 

Systematic failures

Inferences aside, however, ?there is little direct evidence to indicate industry-wide non-compliance with anti-money laundering (AML) procedures in the legal sector. First, the rules concerning SARs have been in place since the Money Laundering Regulations (MLR) came into force in 2004. The number of property-related SARs lodged since then has always been small. 

Yet, absent a few high-profile instances of rogue behaviour, such as in the James Ibori case, there have been few significant prosecutions of lawyers or examples of regulatory enforcement action that ?would suggest a systemic failure to meet the reporting and AML obligations under the Proceeds ?of Crime Act 2002 (POCA), the Money Laundering Regulations 2007, and the Terrorism Act 2000. 

Second, the Solicitors Regulation Authority (SRA) visited some 375 law firms in the last year to review their money-laundering procedures. Only a small proportion required a second visit. Speaking to the Financial Times, the head of the SRA, Paul Philip, highlighted only ‘one or two examples where… we have found practice that we would think would be suboptimal’, while conceding that practices found at some City law firms did ‘raise an eyebrow.’ 

Consequently, in its ‘Risk Outlook 2014/2015’ report, the SRA recommended that bigger practices conduct additional due diligence on high-net-worth clients and analyse high-risk work on a case-by-case basis. For smaller firms, it expected senior partners to ensure they were familiar with the MLR. 

Third, it is common knowledge that the anonymity provided by overseas-based bodies, such as trusts, nominee companies, and fiduciaries, makes them very attractive vehicles to money launderers, especially when they are established off shore. It is estimated that 36,000 properties in London worth more than £122bn are owned through such structures. 

The MLR and Law Society guidance require firms to identify the ‘beneficial owners’ of a business entity they act for in a property transaction. For various reasons, not least the lack of transparency of company ownership records in some jurisdictions, it would appear that these enquiries will not always reveal who the ‘ultimate beneficial owners’ are, so as to give rise to the need to file a SAR. Identities are often hidden behind several layers of opaque ownership vehicles. In particular, difficulties arise with some offshore tax havens that will ?not disclose the identities of company directors or, if they do, those named are nominees. 

Register of ownership

The UK government has recently announced it will enforce its own domestic, publicly accessible, and transparent register of company beneficial ownership, hoping that other countries will follow suit. On 25 of April 2014, David Cameron wrote to the governments of the British Overseas Territories asking them to make ‘company beneficial ownership information open to the public’. The initiative, though, will not eliminate the problem. Launderers who use the vehicle of a discretionary trust, for example, may still be able to disguise the identity of any beneficiaries. 

Regrettably, it seems that several offshore territories, including the Cayman Islands, ?the British Virgin Islands, and Bermuda, are refusing to implement this idea after consultation. What steps the government is prepared to take to force the issue – such as blacklisting countries – remains to be seen.

In the meantime, until an internationally acceptable political solution can be found, lawyers and other professionals in the property sector would be well advised to review their AML systems to ensure they comply with the latest guidance. SJ

Roger Sahota is a consultant solicitor at Hodge Jones & Allen @hodgejonesallen www.hja.net