Why are lawyers at risk of being used for money laundering?

# Money laundering risks for law firms

Even though law firms are not financial institutions, lawyers are still at great risk of being used for money laundering. A perpetrator may seek legal assistance to appear legitimate in their illicit financial, corporate, or real estate transactions. For example, legal services may be purchased with the intention of transferring funds through a law firm’s customer accounts. This could be to either legitimate the funds, or to use the firm’s professional status to enhance the legitimacy of a transaction.

Money laundering is facilitated by concealing the connection between perpetrators and the proceeds of their crimes. Lawyers may unknowingly be involved in money laundering activities when their services are used for depositing, transferring, or withdrawing funds. 

Lawyers have an ethical responsibility not to facilitate or support illegal activities, while criminals continue to use complex schemes and transactions to launder money. Legal professionals are responsible for not only understanding their AML/KYC obligations but also for implementing the correct procedures to prevent money laundering.

# Regulatory differences and consequences

In the EU, lawyers are subject to specific reporting obligations relating to Know Your Customer (KYC) and Anti-Money Laundering (AML) related legislation. Every jurisdiction has its own regulations, but even within each jurisdiction several different laws and regulations may apply.

Law firms in the EU are directly subject to AML regulations, whereas law firms in the US are not similarly required by law to comply with them. However, this does not mean that they are not responsible for anti-money laundering and counter-terrorism efforts.

Complying with these obligations means training staff to identify complex transactions that may pose a high risk. Law firms should take appropriate action if they suspect a client, or a potential client, is laundering money or financing terrorism or intends to do so. It is equally important for lawyers to correctly identify clients when they are establishing business relationships for high-risk transactions.

# Penalties for non-compliance

Non-compliance can result in different kinds of penalties:

• administrative sanctions, such as public warnings
• administrative fines
• penalty payments
• criminal penalties, such as fines or even a jail sentence.

Over the past few years, banks have been fined heavily for failing to comply with regulatory requirements. Board members and senior management of regulated industries can also be held personally responsible for non-compliance within their companies.

# An increased need for monitoring

Before the recent unrest and increased tensions in Europe, most registry searches focused on customer identification and money laundering. Now, it is increasingly important to also understand the background information of your customers and business partners. To protect their reputation, companies must act in a responsible manner and in compliance with the law. Additionally, companies must ensure that customers and business partners do not appear on any sanctions list.

# The importance of Knowing Your Customer

Corporate clients range from small start-ups to multinational financial institutions, which means keeping up with KYC/AML regulations can be demanding, especially if your processes are not automated or managed efficiently.

All companies regardless of their industry are open to being at risk fraud. KYC and KYB (Know Your Business) are not only important because of AML regulations, but also for protecting business interests, such as avoiding scams and fines, and ensuring that companies operates in an ethically sustainable manner.

# PEP Screening

In certain industries, KYC and KYB are legal requirements. Companies need to screen their customers to determine whether they are a Politically Exposed Person (PEP) - a political figure or person with a public position that makes them vulnerable to blackmail, corruption, or other financial crimes.

Neglecting these KYC/AML obligations may lead to severe consequences and even loss of license. Law firms can be charged with criminal offences if they fail to take reasonable steps to identify the true ownership of their corporate customers. The severity of the consequences depends on the level of negligence and the jurisdiction where the company operates.

Doing business with the wrong people can also incur a lot of bad publicity for a company. The KYC process begins when a new client contacts the company and it continues throughout their relationship with the company. A key aspect of this process involves verifying key details and monitoring potential suspicious activities so that they can be flagged as early as possible.

AML and Counter-Terrorist Financing (CTF) obligations apply to all law firms, regardless of their type of practice, but especially those who operate within conveyancing, real estate, trusts or manage client funds on a regular basis.

# Continuous monitoring and compliance of AML/CTF obligations

Compliance officers are responsible for monitoring activity throughout a client relationship, keeping secure records, and reporting suspicious transactions or behaviour to authorities.

Activities that may raise suspicion include:

• Payment method or timing that is unusual e.g. paying a deposit early in a purchasing process
• Clients who avoid in-person contact without a proper reason
• Back-to-back purchases of properties, circular transactions, use of front companies and/or representatives with no real business connection
• Unusual activity in the trust account, such as overpayments and refund requests
• Transactions without adequate legal documentation, reason or purpose
• Large cash payments
• Insufficient information about clients or their businesses.

# Defining UBOs can be challenging

To comply with KYB, a company needs to do more than only identify the company with which it does business. You are required to identify the Ultimate Beneficial Owners (UBOs) across borders and jurisdictions. UBOs are the natural persons who ultimately benefit from the ownership or control of a company. As an example, in the EU a UBO is defined as someone who owns or controls more than 25 % of a corporation. Some local laws may also define UBOs differently, making the calculation of ownership thresholds more challenging. Also, in fit & proper and similar assessments reliable person identification may be required even with lower control thresholds.

For UBO identification, information must be retrieved from international registers if they own shares or otherwise exercise control in a company. If no person qualifies as an UBO based on ownership or control, each person in the top management is registered as UBO based on their position.

# Simplifying the UBO identification

In a large corporation it may be difficult to ensure that all necessary compliance checks are directed to correct individuals and entities due to the complexity of ownership structures. It is possible that the ultimate owner of a company is on top of a long control chain, consisting of nominee shareholders, holding companies, and/or trusts controlled by other entities in other jurisdictions.

Finding UBOs can be greatly enhanced by using automated digital identification systems. Signicat simplifies the UBO identification through a single API by:

1. offering access to trusted global data sources
2. assisting in calculating the ownership of shares
3. identifying the true control of an organisation, including voting power and exercise of control based on position.