Services What is Money Laundering? A Guide for Law Firms
Money laundering is a growing concern for governments, financial institutions, and law enforcement worldwide. In the UK alone, it costs the economy over £100 billion annually, highlighting the importance of vigilance, especially for those in the legal sector.
This article explores professional money launderers (PMLs), the anti-money laundering (AML) framework, and the role of law firms in preventing money laundering both in the UK and internationally.
Definition of Money Laundering
Money laundering is the process of disguising the origin of illegally obtained funds, often by moving them through a series of complex financial transactions. This allows criminals to make “dirty” money appear legitimate.
Law firms are particularly at risk because they handle high-value transactions, sensitive client information, and complex corporate or property deals.
Example: A criminal uses a law firm to buy property with illegally obtained money. By routing funds through multiple accounts and companies, the origin of the money is disguised, making it appear legitimate.
Book a free consultation today to strengthen your firm’s AML compliance.
Content
- Why are law firms at risk from money laundering
- Three stages of money laundering
- Common method of money laundering & risks for law firms
- AML Framework
- Which legal services fall under AML requirements
- Overseas Transactions & Complex Cases
- The role of AML Services
Why Are Law Firms at Risk From Money Laundering?
Law firms occupy a unique position in the financial system, which makes them attractive targets for criminals and professional money launderers (PMLs):
High-Value Transactions
Law firms frequently handle large sums through property purchases, corporate deals, mergers, or client investments. These transactions provide opportunities for criminals to move illicit funds.
Access to Sensitive Client Information
Firms have insight into corporate structures, financial accounts, and property ownership. Criminals may exploit this access to conceal illegal funds, knowing lawyers are trusted with confidential information.
Complex Transaction Structures
Cross-border deals, multi-party agreements, and corporate reorganisations can be misused to layer and integrate illicit funds, making detection more difficult.
Reliance on Professional Trust
Lawyers are expected to follow client instructions. This trust can be exploited if AML checks are insufficient or transactions are assumed legitimate.
Regulatory Scrutiny and Liability
Failing to detect money laundering can expose a firm to:
- Penalties from the SRA or FCA
- Criminal prosecution
- Reputational damage that may affect client trust
Emerging Risks and Digital Channels
Cryptocurrencies, digital assets, and offshore structures allow criminals to move funds across borders. Firms engaging in international or digital transactions face additional AML challenges.
Law firms are at risk because they are at the intersection of large financial flows, sensitive client information, and complex transactional activity. Robust AML policies, training, and monitoring are essential to prevent becoming a conduit for criminal funds.
The Three Stages of Money laundering
Money laundering typically involves three stages:
1. Placement
Illegal funds are introduced into the financial system. This may involve cash deposits, buying high-value goods, or investing in property or businesses.
2. Layering
The funds are moved through multiple transactions to obscure their origin. This can involve transferring money between accounts, using different jurisdictions, or converting funds into other assets or currencies.
3. Integration
The funds re-enter the legitimate economy. Criminals may purchase property, invest in companies, or withdraw funds as if they were genuine income.
Common Methods of Money Laundering & Risks for Law Firms
Money launderers use a variety of techniques to conceal illicit funds, many of which can intersect with the work of legal professionals. Common money laundering methods include:
Structuring (Smurfing)
Breaking large sums into smaller, less suspicious transactions to avoid detection. Read our article on What is Smurfing in Money Laundering to understand more.
Trade-Based Money Laundering
Manipulating invoices or trade values in international transactions to disguise the movement of funds.
Shell Companies
Using companies with no real business activity to move or store illicit funds.
Cryptocurrencies
Exploiting the perceived anonymity of digital currencies to transfer money across borders.
For law firms, these methods may appear through client funds, transactional work, property deals or corporate instructions.
The AML Framework: Key Responsibilities for Law Firms
The Solicitors Regulation Authority (SRA) and Financial Conduct Authority (FCA) require firms to implement robust AML systems and controls. Core components include:
Risk Assessment
Law firms are required to conduct comprehensive assessments of AML risks at client, matter and firm-wide levels. Under the Money Laundering Regulations 2017, firms must complete a formal Regulation 18 Firm-Wide Risk Assessment.
Customer Due Diligence (CDD)
Verifying client identity and understanding the purpose of a transaction are essential steps before forming a business relationship.
Monitoring and Reporting
Client activity must be monitored on an ongoing basis. Suspicious behaviour should be reported promptly to the firm’s Money Laundering Reporting Officer (MLRO).
Record Keeping
Firms must maintain accurate AML records, including identification documents and transaction details, for at least five years.
Training and Awareness
Regular staff training, regarding AML procedures, is mandatory. All employees should understand money laundering risks and know how to report concerns.
Which Legal Services Fall Under AML Requirements?
The governing body, currently the Solicitors Regulation Authority (SRA) requires all areas of law to maintain baseline AML controls. These include:
- Appointment of an MLRO - Money Laundering Reporting Officer
- Staff Anti Money Laundering (AML) training
- A documented AML risk assessment
Additionally, all legal practices must:
- Screen clients and transactions against sanctions lists
- Remain alert to tax evasion and terrorist financing risks
- Identify and monitor Politically Exposed Persons (PEPs)
Failure to comply can result in severe legal, financial and reputational consequences.
The Role of Law Firms in Preventing Money Laundering
Law firms are uniquely positioned to detect suspicious activity due to their involvement in high-value transactions and their access to client information. Responsibilities include:
- Assessing the legitimacy of funds
- Understanding the purpose of transactions
- Identifying unusual patterns or inconsistencies
- Submitting Suspicious Activity Reports (SARs) when required
Beyond regulation, law firms also have an ethical duty to uphold the integrity of the profession and avoid facilitating unlawful activity.
Overseas Transactions: Increased Risks
Cross-border activity introduces additional money laundering risks because it can involve multiple jurisdictions, currencies and regulatory systems. Key risks include:
Movement of Funds Across Borders
Complex structures and multiple institutions make tracing funds difficult.
Virtual Currencies and Digital Assets
Cryptoassets can provide anonymity and allow rapid international transfers.
Trade-Based Money Laundering
Over- or under-invoicing and fictitious transactions can disguise illicit flows.
Shell Companies and Offshore Accounts
These structures hide beneficial ownership and make it difficult to identify the true source of funds.
The Economic Crime and Corporate Transparency Act 2023 has introduced further requirements relating to the registration of overseas entities, making it essential for firms to stay updated.
Do You Require Further AML Training?
To remain compliant in an evolving regulatory environment, firms must ensure their teams receive regular, comprehensive AML training. Our bespoke AML training services are delivered by experts and designed to be clear, practical and relevant to your practice areas.
Book a free consultation today to strengthen your firm’s AML compliance.
