Commercial Awareness – Understanding Money Laundering
22nd August 2018
For those of us whose ideal Saturday night involves a takeaway and binge-watching Netflix, the cult-classic Breaking Bad, its lawyerly spin-off Better Call Saul and the darkly engrossing Narcos have all become essential viewing. Although the representation of the law and lawyers in these shows is often even less realistic than in Suits, there is an element of accuracy in that their portrayal of criminal activity does reflect a major concern for both public and private organisations – what are the bad guys doing with their ill-gotten gains?
What is Money Laundering? Money laundering refers to the process by which the proceeds of crime are cleaned-up to make it look as if they are derived from legitimate sources. Criminals with large amounts of dirty cash can't just deposit the money into a bank account. This would likely end up alerting the authorities, presenting a risk to the success of whatever illicit activity generated the profits and possibly resulting in lengthy jail terms for the participants. Clever methods are needed to hide the money and not draw attention to criminal behaviour.
Pop culture is rife with examples of money laundering fronts, from the car wash in Breaking Bad to the ubiquitous restaurant-cum-nightclub in virtually every mobster epic. The fiction is close to reality, as the idea is that the dirty money can be made to look like clean money from paying customers in order to disguise its true origins.
Aspiring lawyers really do need to be aware of the risks posed by money laundering, how to avoid getting involved, and the compliance obligations in respect of it. This is relevant for all lawyers, but particularly those who want to become sole practitioners or work in smaller firms where you'll likely be responsible for performing due diligence on clients yourself. An awareness of the risks facing law firms and financial institutions can really impress on application forms and at interviews as well, as it shows a deeper understanding of the business of law firms and their clients.
How does Money Laundering work?
So how are criminals likely to use a law firm to launder money? What are the consequences of becoming complicit in a money laundering scheme? And how do law firms minimise the risk posed by money laundering to their businesses?
The classic example is that a criminal will instruct a solicitor to open a matter concerning a purchase. The criminal will say that they want to buy a property, or have identified a target company that they would like to acquire. They will put cash on account for good measure, or give the solicitor the purchase price in advance of completion. But before the deal is done, the criminal will have a change of heart and decide that they want their money back. Not a problem, right? Everyone changes their minds, and it would be a breach of professional conduct to commit a client to a transaction that they haven't consented to.
The issue is that the law firm has laundered money by accepting dirty cash, and then giving it back to the client on a legitimate firm cheque or via a legitimate bank transfer. With this veneer of respectability, the money is now more likely to be accepted by a bank, no questions asked. Other things to look out for include fees being paid by third parties or unusual transactions, such as the purchase of assets at well below market value.
Any good lawyer will refuse to act for a party where there is even the slightest suggestion of involvement in something shady. In addition, the professional and criminal repercussions of being involved in money laundering can be so severe so as to make even the most morally-bankrupt think twice.
Proceeds of Crime Act 2000
The main money laundering offences are set out in the Proceeds of Crime Act 2000 (POCA). The most relevant offence for a solicitor is that of 'arranging', which involves knowing or suspecting that an arrangement facilitates the "acquisition, use, retention or control of criminal property by or on behalf of another person". It is also an offence to acquire, use or possess criminal property.
Taken together, these offences are very broad and could catch everything from the sort of transaction noted above to simply receiving criminal property as payment for the firm's fees. The consequences can be dire – jail sentences can be for up to 14 years and combined with heavy fines. It is likely that the Solicitors Regulation Authority would take action, too.
The main defence is that of making an "authorised disclosure". Where there is a suspicion of something fishy, a lawyer may be excused of involvement if they tell their firm's Money Laundering Reporting Officer (MLRO). In turn, they MLRO may decide to make a disclosure to the National Crime Agency (NCA) if the situation looks particularly serious. Importantly, it is an offence to fail to disclose if you know or suspect or have reasonable grounds for knowing or suspecting that another person is engaged in money laundering – so always tell the MLRO if you spot something dodgy!
Law firms take their prevention of money laundering and terrorist financing obligations very seriously, and often have their own dedicated anti-money laundering (AML) teams to help minimise the risks posed by criminals who wish to use the Firm to achieve nefarious ends. A career in risk and compliance can be interesting, varied and well-remunerated, too.
Overall, my advice for aspiring lawyers is to understand how and why firms can be affected by money laundering and what your obligations are – so pay attention when it comes up on the LPC!
Look out for stories about money laundering in the news, and start trying to understand the different schemes and methods used by criminals and how you could unwittingly become caught up. Who knows, one day it may be your disclosure that helps to bring down an international drugs, arms or human trafficking ring.
by Alexander Leighton