Checking Sources of Funds in Financial Transactions

In compliance terms, the main story of the year was without doubt the implementation of the revised Money Laundering Regulations in June. Domestically based politically exposed persons acquired the same status as their foreign counterparts and the issue of beneficial ownership received more attention. Meanwhile, HMRC continues to struggle with its new obligations to register the beneficial ownership of qualifying trusts and the revised UK AML risk assessment confirms the experience of the great majority of law firms to date that “there is no specific evidence of (legal) services being abused by terrorists”. Whereas the risks of exposure by lawyers to money laundering are therefore adjudged to be high those relating to terrorist financing are regarded as being low (see National Risk Assessment of Money Laundering and Terrorist Financing 2017, para 7.13).

The fact that the final version of the Regulations appeared only a few days before they had to take effect under the EU Directive meant that there was general acceptance that a grace period would apply in relation to the steps required to address the new requirements. As featured in various of our e-newsletters in recent months, the main challenges were those that related to the management of the AML regime with particular emphasis on risk-bas policies. By now all firms that are subject to the regime should have conducted their risk assessments (r.18) and should at the very least be well under way in revising their AML policy accordingly. Much the same should be taken to apply to the new offence of facilitating tax evasion under the Criminal Finances Act 2017 (see our October e-newsletter). Subscribers will find precedent materials for the changes required on our website (see the Office Procedures Manual section and Factsheet 27 on the Infolegal Compliance Hub).

Once all of this has been dealt with we can then return to the practical problems faced on a day-to-day basis by law firms seeking to comply with the anti-money laundering compliance burden. Looming large in this respect is the vexed question of how muchchecking of the source of funds is required, especially in conveyancing purchases. Despite the everyday nature of this problem, there is little by way of advice on the issue and therefore wide variations can be observed between the checking processes of many firms with similar profiles. These can be described as ranging from “the funds are coming from a UK bank, so we’re OK” to “we require documentary proof of how your parents came by their savings so as to be able to gift £25,000 to you for your purchase”. The first of these approaches is misguided in thinking that the banks will necessarily be foolproof in relation to their responsibilities in relation to checking both cash and electronic transactions. The second approach risks conveyancers becoming bogged down in seeking proof of legality where there is little obvious risk presented by the facts of the transaction, and in so doing causing irritation to clients and their relatives.

The two linked issues which present themselves are identifying any beneficial owners who might have an incidental interest in the transaction and understanding the source of funds to be used. These problems are compounded when international interests are involved, in which respect it was reported earlier this month that only one in 20 new City properties had been purchased by UK buyers of late and that four luxury properties in Mayfair and Belgravia were under investigation having been acquired by a network of offshore companies that were reckoned to be linked to the former dictator of Uzbekistan. How any law firm could realistically conduct investigations into such arrangements and unravel such a picture is an increasing problem.

We may soon see progress in this regard, however, through the Sanctions and Anti-Money Laundering Bill now making its way through Parliament. The bill reached the Committee Stage earlier this month with cross party support and promises to create a register of beneficial owners of UK properties. Once enacted and compiled this will no doubt prove to be enormously helpful to firms conducting property work, in much the same way that the task of identifying beneficial ownership of companies has been greatly facilitated through the introduction last year of a register of “persons of significant control” at Companies House.

For the time being in relation to checking the source of funds it is as well to remember that the primary obligation for lawyers under the Proceeds of Crime Act 2002, and the revised Money Laundering Regulations, is to prevent money laundering rather than to detect it. So far as beneficial ownership issues arise r.28(4) requires that you take only “reasonable measures” to verify the identity of beneficial owners and it seems fair to adopt the same risk-based approach in relation to the source of funds, whoever they belong to. There is no specific requirement to check the client’s bank accounts but it might be a sensible measure when doubts arise. Likewise, there is no need to quiz the client as to whether they have a criminal past but when the issue arises the adviser should pursue enquiries as to the nature of any convictions, as the SDT disciplinary case of SRA v Tidd [2013] 1178-2013 shows. To quote Lord Denning somewhat out of context, it is fair to see the duties of the lawyer when considering the source of funds as being to act like “a watchdog and not a bloodhound” (Lord Denning referred back to the 1896 case of Re Kingston Cotton Mill in his judgment in Fomento (Sterling Area) Ltd v Selsden Fountain Pen Company, 1958 when describing the role of an auditor).

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