Money laundering is defined as where the proceeds of crime are processed to make them appear legitimate. Solicitors and other professional advisers are now required to take appropriate measures to ensure that they are not a party to any laundering operation.
It had been thought only those transactions to which the 1986 Financial Services Act (FSA) applied would fall under the laundering provisions. It is now clear that the regulations apply to virtually all aspects of solicitors' business with clients and not only to those engaged in business regulated by the FSA.
The regulations require firms to create and maintain procedures to combat money laundering. The requirements include maintaining procedures to identify clients and others from whom money comes, keeping records, internal reporting and training. The Law Society has issued guidance to solicitors on the substantive law and its application. Much of it applies equally to other groups of advisers, however, particularly those who conduct investment business.
Under the regulations firms commit an offence if they provide assistance to a person when they know or suspect (or in the case of terrorism ought to have known or suspected) that money coming into their hands is the proceeds of serious criminal conduct.
Possession of the funds is a complete offence, albeit subject to defences. One is that the firm reported the facts to the authorities. The problem here, however, is that this would be a breach of the client's right to confidentiality under legal professional privilege rules. There is a specific saving for such privilege but not where the lawyer has certain knowledge of criminal activity: in this case he has no alternative but to report.
Firms must create internal reporting procedures and make sure that everyone in the firm likely to deal with transactions to which the regulations apply is aware both of their nature and scope and of the firm's internal procedures. Initial and continuing training must be provided. Training materials are available but at a cost. Courses do exist but, again, at a cost.
Every firm must have a compliance officer. Anyone within the firm can relieve him or herself of liability for failure to report by reporting to the compliance officer, who is also responsible for ensuring that client records are maintained. Failure to create reporting procedures or to appoint a compliance officer is an offence.
The regulations also require records to include identification of the client. The guidance suggests checking a passport, the telephone book or electoral roll or even an electricity bill. None of these measures is conclusive proof that the person in front of you is who he says he is, though, and there is a high risk of being taken in. To protect themselves, therefore, it is important that firms strictly comply with their own in-house procedures.
The guidance suggests that clients who instruct solicitors many miles from their home or place of work are inherently suspect - this is clearly an oversimplification in the case of the many firms with clients all over the UK and beyond. But there is a real difficulty for the many firms who as a matter of course do not meet their clients, particularly in residential conveyancing transactions. Strict compliance with the regulations may in the end lead to a client's choice of solicitor becoming restricted to one that he can get to in working hours.
Where the client is a company not listed on the UK Stock Exchange, the solicitor should seek evidence of the identity of participators in the company as if the client were an individual. Clearly, investigations such as these could easily lead to the alienation of clients, and firms are going to have to find a way of convincing them that these steps are desirable. If funds are transferred from an account held in the name of the client by a financial institution to whom the money laundering regulations apply, there will be no need for a further identity check unless the firm suspects possible money laundering.
Of major concern to small firms is the administrative cost of yet another set of regulations. Bearing in mind the expense - in both time and money - of compliance with the solicitors' accounts rules, the professional practice rules, the FSA, the Data Protection Act and, for some, legal aid franchising, a further set of regulations demanding training, systems and partners' time is a significant blow. Firms with quality management systems in place may find the additional regulation less burdensome than do those with a less structured approach to management.
Some practices may take the view that the regulations will not affect them, but they should be aware that failure to comply with the money laundering regulations can have far more serious effect on a firm than breaches of most of the other sets of regulations
Nigel Morris-Cotterill is a solicitor with Millet Hall.
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