What is Money Laundering?

In today’s complex financial landscape, money laundering has emerged as a significant concern for governments, financial institutions and law enforcement agencies worldwide. This financial crime is estimated to cost the UK economy more than £100 billion each year, emphasising the need for businesses to be vigilant against money laundering. We all have a duty of care against financial crime, especially those within the legal sector.

This article will discuss professional money launderers (PMLs), the anti-money laundering (AML) framework, the role of law firms and other key information to help law firms maintain controls and vigilance against money laundering in the UK and overseas.

Defining Money Laundering

Money laundering is a clandestine process of disguising the origins of illegally obtained money, not atypically by passing it through a complex sequence of banking transfers or commercial transactions. This illicit practice allows criminals to integrate "dirty" money into the legitimate financial system, making it appear as if it were obtained through lawful means. Professional money launderers (PMLs) pose the largest threat, operating for organised crime groups (OCGs) by laundering the proceeds of their crimes “off-grid”. PMLs launder money via a range of different criminal activities, from human trafficking to tax fraud, operating in countries where they believe they are out of reach from the UK government and using methods to hide the true source of funds.

Money laundering constitutes 3 key stages:

1. Placement - Illegally obtained funds are introduced into the financial system. This often occurs through cash deposits into bank accounts, purchases of valuable assets such as real estate or luxury goods, or investments in businesses.
2. Layering - Once the funds are in the financial system, they are layered or moved through a series of transactions to obscure their origin. This may involve transferring funds between multiple accounts, across different jurisdictions, or converting them into different currencies.
3. Integration - involves integrating the laundered funds back into the legitimate economy. This could be accomplished by purchasing legitimate assets or investments, such as stocks or businesses, or by simply withdrawing the funds as seemingly legitimate income.

What Are the Main Methods of Money Laundering?

Money launderers employ various techniques to obfuscate the illicit origins of their funds. These actions are usually challenging to detect, but regulatory bodies such as the Solicitors Regulatory Authority (SRA) and the Financial Conduct Authority (FCA) require organisations to have robust AML processes and controls in place and to be vigilant against money laundering.

Research has highlighted of the more common methods of money laundering, and these include the following;

• Structuring/Smurfing - This involves breaking down large amounts of money into smaller, less suspicious transactions, to avoid triggering reporting requirements.
• Trade-Based Laundering - Criminals may use trade transactions to disguise the source of their funds. For example, they may over-invoice or under-invoice goods in international trade to transfer value across borders.
• Shell Companies - Setting up shell companies (inactive companies) with no legitimate business activity can be used to funnel illicit funds through seemingly legitimate channels.
• Cryptocurrencies - Digital currencies like Bitcoin have gained popularity among money launderers due to their perceived anonymity and ease of use in transferring funds across borders.

Fighting Money Laundering Using AML Frameworks, Controls & Procedures

In response to financial crimes such as money laundering and terrorism financing, the SRA requires firms to detect and mitigate suspicious activity and report any instances. Whether this is managed via the FCA AML framework, or AML processes and controls, there are several key components designed to safeguard the integrity of the financial system and protect businesses from the reputational, legal and financial consequences involved in illicit financial activities. The main components include;

• Risk Assessment - Law firms are required to conduct risk assessments to identify, understand and manage the risk of money laundering. These assessments are expected on customer, transactional and institutional levels. The Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 require firms to perform a formal R18 Firm-Wide Risk Assessment.
• Customer Due Diligence (CDD) - CDD is a crucial part of the AML framework. Firms are required to verify the identity of the customers, aiming to understand the nature of their clients before starting a business relationship.
• Monitoring and Reporting - Continuous monitoring of customer activities is required. If any suspicious behaviours or activities are detected, they should be reported to your firm’s MLRO without delay.
• Record Keeping - Firms conducting work within the MLR areas of law must keep accurate records of all customer interactions, transactions and due diligence measures. These documents should be kept for at least 5 years after they were first established.
• Training and Awareness - The SRA requires firms to undertake regular staff training, regarding AML procedures. This is vital as staff must be aware of the risks of money laundering, and know how to report suspicious transactions or activities.

Which Legal Services Does the AML Apply to?

The Solicitors Regulation Authority (SRA) expects all areas of law to have at least baseline controls in place to combat money laundering and other financial crimes. These include;

• A Money Laundering Reporting Officer (MLRO)
• AML training
• A documented risk assessment of the AML risk to which they are exposed

There are also related items to the AML framework which can apply to all areas of law, including strict penalties, which are particularly severe towards those who breach AML regulations or fail to maintain satisfactory controls. These penalties include legal, monetary and reputational consequences towards the organisation that violates the regulations. Practices should screen their customers and transactions against lists of Sanctioned individuals and entities to prevent inadvertently facilitating transactions with sanctioned parties. This obligation applies universally to businesses dealing with financial transactions.

All areas of law have obligations to be vigilant against offences such as tax evasion and terrorist financing.

Identifying and monitoring PEPs (Politically Exposed Persons) is a critical component of AML efforts, as it helps mitigate the risks associated with financial transactions involving individuals with significant political exposure. By implementing robust due diligence measures and monitoring systems, regulated entities can contribute to the prevention and detection of money laundering and other financial crimes involving PEPs. All law firms have a duty of care to be vigilant with this component of the framework, regardless of the legal services which the firm may conduct.

The Role of Law Firms

Law firms play a crucial role in the fight against money laundering, due to their involvement in various financial transactions and their access to sensitive information. Because of this, law firms must be vigilant in identifying any suspicious transactions or activities that may indicate money laundering. This includes scrutinising the source of funds, the purpose of transactions, and any unusual patterns or behaviours.

If law firms encounter suspicious activity, they are obligated to file Suspicious Activity Reports (SARs) with the relevant authorities. This helps law enforcement agencies investigate potential money laundering or other financial crimes. In addition to legal requirements, law firms have ethical obligations to uphold the integrity of the legal profession and the justice system. This includes refraining from facilitating or participating in illegal or unethical activities, including money laundering.

By fulfilling these responsibilities, law firms contribute to the broader efforts to combat money laundering and uphold the financial system's integrity and maintaining the legal profession's reputation.

Overseas Transactions

Overseas transactions present their own set of challenges and risks in the context of money laundering, due to the potential for anonymity, complexity, and cross-border regulatory differences. Greater attention is, therefore, required, and the Economic Crime and Corporate Transparency Act 2023 sets out to make provisions for the registration of overseas entities. There are several reasons why overseas transactions pose more of a risk, including the following;

• Cross-Border Movement of Funds - Money launderers often exploit the global financial system to move illicit funds across borders, making it difficult for authorities to trace the origin and destination of the funds. Overseas transactions can involve multiple jurisdictions, currencies, and financial institutions, adding layers of complexity to the laundering process.
• Virtual Currencies & Digital Assets - The rise of virtual currencies and digital assets has further complicated the landscape of overseas transactions, offering new avenues for money laundering and terrorist financing. Cryptocurrencies, in particular, provide a degree of anonymity and decentralisation that can be exploited by criminals seeking to launder illicit funds across borders.
• Trade-Based Money Laundering - Overseas international trade transactions can be exploited for money laundering purposes through over- or under-invoicing, trade mispricing, and fictitious transactions. These schemes involve manipulating the value or volume of goods traded to disguise the movement of “dirty money” across borders.
• Shell Companies & Offshore Accounts - Overseas transactions are frequently conducted through shell companies and offshore accounts to conceal the true ownership and source of funds. These structures make it difficult for law enforcement agencies to identify and trace the beneficial owners involved in money laundering schemes.

Do You Require Further Training on AML?

Your firm needs to be up-to-date with AML regulations to stay vigilant against money laundering, especially in the current digital age. Our bespoke AML training services are delivered by AML experts, offering an easy-to-understand approach. Book a free training consultation today.