Under the Proceeds of Crime Act 2002 solicitors, along with other professionals, are under a legal obligation to take reasonable steps to ensure that their firms’ client accounts are not used by criminals for the purpose of laundering money earned through illegal activities.
Purchasing property is a favourite method of laundering money due to the fact that it is one area where people of ordinary wealth can conduct high value transactions without raising suspicion and large conveyancing firms who deal with a high volume of transactions and very often do not meet clients in person are often targeted by criminals.
The checks that have to be carried out on clients as a result are often inconvenient and can seem excessive, particularly if the fee earner handling the transaction is following his firm’s protocol without really understanding, and therefore being unable to explain the reasons behind them, himself.
In any transaction the solicitor must verify his client’s identity (this is done as an anti-fraud measure as much as an anti-money laundering one). The exception is where the client is an established client of the firm. If the client is known personally to the solicitor acting then he can verify his identity based on his own knowledge. The verification must be done before any significant work is carried out on the file and in particular before any money, even small amounts such as a payment on account for searches for example, is accepted from the client.
Traditionally a client’s identity is verified by inspecting his identity documents. The solicitor should insist on seeing both photographic ID, so a valid current passport, photocard driving licence or armed forces ID card, or National Identity Card and proof of address in the form of a bank statement, PAYE tax coding notice, utility bill or council tax bill. Credit card statements or other correspondence is not generally acceptable though this will be at the discretion of the firm. The proof of address correspondence must be addressed to where the client is actually living at the time and this should be the address to which you correspond with him. The solicitor should ask to see originals, of which copies should be taken and certified as being true copies of the original for the file.
The reason for needing proof of address for the client’s current address and for limiting what types of correspondence are acceptable is that some fraudsters or money launderers will simply break into an empty property and use any mail addressed to the previous occupier to begin creating a new identity.
If the client is unable to deliver originals to his solicitor then copies certified as being true copies of the original by a solicitor, licensed conveyancer, judge, barrister, police officer or foreign lawyer (who must be listed on a register which the solicitor acting is able to inspect) or a member of staff at a British embassy or consulate.
What Happens If the Client Does Not Have Identity Documents?
Particularly when acting for elderly clients, it will sometimes be the case that they have no photographic ID. The elderly often don’t have passports and don’t drive, and they will obviously not be in the armed forces. In these situations there are other methods which can be considered for verifying the client, such as a letter from a solicitor who knows him personally, or from his GP for example. Caution is always advised however and the transaction as a whole should be carefully considered in terms of whether it appears to be unusual in any way.
If the client is unable to produce the necessary proof address, which might happen if for example he is currently lodging temporarily somewhere but his mail is still being sent to a previous address, the easiest way to resolve this is to ask him to contact his bank and have them update his address and sent out a bank statement. It is unlikely that he will not have a bank account. Certainly if he is buying a property with cash then that cash will need to reach you through a bank and if he is getting a mortgage the repayments will need to be made by direct debit from his account. If he is selling he’ll need an account for the sale proceeds to be paid in to and if he currently has a mortgage then he must be making payments by direct debit.
Electronic Identity Checks
There are now organisations through which clients’ identities can be electronically verified. These organisations have access to all kinds of information including credit histories, the electoral roll, national insurance records, passport records etc.
The client will simply need to provide some personal information including a passport number, national insurance number, date of birth and current address and when this information is input by the solicitor it will be compared automatically with the information held for that person to establish whether it all matches. If it does then the result will be returned as verified. If it does not then the result will be unverified and the solicitor will need to make further enquiries, including asking for paper ID documents.
There is a charge for the service and in addition some solicitors will add a professional fee for time spent carrying out the search but in total it will not usually be more than £10 (plus VAT) per name. This method is often preferable to producing original documents where they would need to be posted as it removed the hassle and the risk that the documents will be lost.
Checking the Source of the Funds
A client turning up with a bag of cash with which to pay for a property would be enough to raise any solicitor’s suspicions, but there are other more subtle ways in which launderers will try to pass illegal money through solicitors’ account and which they need to try and guard against.
Funds Must Not Be Paid In Cash
Cash should never be accepted from a client as it is not possible to trace its source. Instead it should only be accepted from a bank account which is not held in a suspect or blacklisted territory. Certain countries are labelled by the Government as blacklisted or suspect either because corruption, terrorism etc is known to be rife and uncontrolled in those countries or because the systems in place to prevent the country’s financial institutions from being used by criminals for money laundering are not considered robust enough.
If the client advises that he has money in an account in blacklisted or suspect territory he must be advised to transfer it to a UK or EU bank before transferring it to his solicitor. It will then be up to the bank to decide whether to accept it and to take the necessary precautions.
As well as electronic transfers, the money can be provided via a banker’s draft or cheque but the same rules apply in terms of the location of the accounts on which the cheques/drafts are drawn.
Funds Provided From the Client’s Own Savings
Where a deposit, or even the full purchase price, being provided from the client’s own savings then consideration should be given as to how the client came by the money, which is likely to be a significant amount. If solicitor is aware that his client has a particularly highly paid job, or if he has recently acted in a transaction on behalf of the client which resulted in him receiving a large sum of money (such as a property sale or the administration of a deceased estate) then further enquiries may not be necessary.
Otherwise the solicitor may enquire as to how the money was obtained. If the client states that he has saved the money over a period of time then the solicitor may ask to see bank statements going back for example for a year to check whether what the client says appears to be accurate. If he sees that deposits have been made by someone other than the client, or that a large lump sum has been deposited, he may need to make further enquiries.
Where the Client Has Received the Funds in a Lump Sum
There are a number perfectly legitimate ways in which a client could receive a lump sum of money. It could be the proceeds of a previous property sale, an inheritance, a compensation payment or perhaps a redundancy settlement. Where the client has received a lump sum the solicitor should make enquiries as to the source of it and ask to see evidence. For example in the case of an inheritance, the proceeds of a sale or a compensation payment the solicitor should contact the solicitor who acted for the client in respect of that matter and ask him to confirm that the client’s claim as to the source of the funds is correct. The client will need to authorise his previous solicitor to release the information.
If the lump sum is a redundancy settlement then the client should be able to produce written confirmation of the amount paid from his previous employer.
Funds Provided by a Third Party
Where funds are provided to the client by a third party and the third party is an individual (as opposed, say, to a solicitor or employer) the solicitor should ask why the third party has provided the funds. Apart from the fact that the individual may acquire an interest in the property as a result of a constructive trust, the solicitor will need to be satisfied that the third party isn’t laundering the money through the client. Obviously people will not generally give other people thousands of pounds without good reason, so that reason will need to be established.
It may be that a parent or other family member has provided the money by way of a gift. If this is the case then the solicitor should contact the donor and ask them to verify that that is the case. He will need to recommend to the donor that he seeks independent legally advice before responding and that he cannot give advice because to do so would be a conflict of interest.
Whoever has provided the funds and for whatever reason, the solicitor should investigate how the donor came by the money just as he would investigate how his client came by it.
Funds Received From a Third Party Without Notice
Sometimes a solicitor will be expecting to receive funds directly from his client but they will actually be sent by someone else. If this is the case then the same steps as those mentioned above will need to be taken to verify the reason for the third party making the payment and the source of the funds.
Until the solicitor is satisfied the funds should not be used, even where this causes a delay to completion and a resulting breach of the contract.
Funds Transferred Directly to Seller’s Solicitor by Purchaser
The purchaser should never transfer the funds required for the purchase directly to the seller’s solicitor, though this will occasionally happen in the hope of saving a bank transfer fee. If it does happen the seller’s solicitor will need to contact the purchaser’s solicitor and check that he has taken the necessary steps in terms of checking the purchaser’s identity and the source of the funds. It should not be enough that the purchaser’s solicitor confirms he is satisfied. Negligence on the part of the purchaser’s solicitor is no defence for the seller’s solicitor in this situation so he should insist on seeing evidence that would satisfy him were he acting for the purchaser and if this is not produced he should not proceed until it is produced.
This will very often lead to a delay in completion and any associated losses should be a liability of the purchaser.
Transactions Where the Seller or Buyer is not Legally Represented
If the seller or buyer is doing his own conveyancing and the other party is represented then the solicitor for the represented party will have to verify the ID of both buyer and seller. If he is acting for the seller he will need to verify the source of the buyer’s funds. It could be argued that doing this could result in a conflict of interest and some solicitors take the view that the verification must be carried out by an independent solicitor.
The Money Laundering Reporting Officer (MLRO)
All solicitors’ firms are obliged to nominate a Money Laundering Reporting Officer. This is usually a partner in the firm and he will be responsible for ensuring that the firm’s anti-money laundering protocols are up to date and will be the person to whom any concerns regarding a transaction should be referred. It will then be his decision whether to cease acting for the client, to proceed or to make a report to SOCA.
Where matters are referred to the MLRO this cannot be disclosed to the client or anyone else. By disclosing any concerns the solicitor may commit the offence of “tipping off”.
Reporting Concerns to SOCA
In extreme cases, where the MLRO believes there is serious cause for concern with respect to a particular transaction, he may make a report to the Serious and Organised Crime Agency, (SOCA, formerly NCIS). SOCA may advise him to proceed with the transaction even if they believe it is suspicious, so as not to tip the suspect off, or they may instruct the MLRO that the transaction cannot proceed. Often they will be satisfied there is no criminal activity taking place and will authorise the MLRO to proceed. The MLRO may not disclose the fact he has made a report to the fee earner actually dealing with the matter.
When an offence is committed by a solicitor (or non-qualified fee earner) under the Proceeds of Crime Act liability rests with fee earner actually responsible, the MLRO and the partners of the firm, whether or not they were aware that the offence was taking place.
It is a criminal offence for a firm not to have in place, and to follow, satisfactory anti-money laundering protocols even where no actual money laundering happens as a result.
Any party to a transaction from which money laundering results may also be guilty of an offence.