Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals
Narrated by: Bachir El Nakib, CAMS, ACFE, CFAP
In many ways, client identification and verification is primary in anti-money laundering compliance to understanding the source of funds and the purpose of a retainer.
Essentially AML/CFT compliance is about limiting the opportunities for criminals to use criminal property. If there is no criminal property, then there is no money laundering.
Client identification is included to remove anonymity for criminals and assist in bringing to the firm's attention clients who may pose money laundering risks due to criminal histories or their association with criminals.
Despite the importance of understanding the source of funds, it is an area which is not well understood in practice and about which a number of misconceptions are regularly repeated at "Money Laundering Reporting Officer (MLRO) networking groups and training events.
Some of the key misconceptions are:
- I only have to check the client's identity; there is no obligation to ask about the source of funds.
- If I have a concern about the source of funds, I have to prove that the money is clean.
- If the money comes from the bank then I don't have to worry about it, as it is clean.
Red Flags with respect to source of funds
The FATF Report Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals dated June 2013 highlighted the following Red Flags in the source of funds
Red Flag 4: The transaction involves a disproportional amount of private funding, bearer cheques or cash, especially if it is inconsistent with the socio-economic profile of the individual or the company’s economic profile.
Red flag 5: The client or third party is contributing a significant sum in cash as collateral provided by the borrower/debtor rather than simply using those funds directly, without logical explanation.
Red flag 6: The source of funds is unusual: o third party funding either for the transaction or for fees/taxes involved with no apparent connection or legitimate explanation o funds received from or sent to a foreign country when there is no apparent connection between the country and the client o funds received from or sent to high-risk countries.
Red flag 7: The client is using multiple bank accounts or foreign accounts without good reason.
Red flag 8: Private expenditure is funded by a company, business or government.
Red flag 9: Selecting the method of payment has been deferred to a date very close to the time of notarisation, in a jurisdiction where the method of payment is usually included in the contract, particularly if no guarantee securing the payment is established, without a logical explanation.
Red flag 10: An unusually short repayment period has been set without logical explanation.
Red flag 11: Mortgages are repeatedly repaid significantly prior to the initially agreed maturity date, with no logical explanation.
Red flag 12: The asset is purchased with cash and then rapidly used as collateral for a loan.
Red flag 13: There is a request to change the payment procedures previously agreed upon without logical explanation, especially when payment instruments are suggested which are not appropriate for the common practice used for the ordered transaction.
Red Flag 14: Finance is provided by a lender, either a natural or legal person, other than a credit institution, with no logical explanation or economic justification.
Red Flag 15: The collateral being provided for the transaction is currently located in a high-risk country.
Red flag 16: There has been a significant increase in capital for a recently incorporated company or successive contributions over a short period of time to the same company, with no logical explanation.
Red flag 17: There has been an increase in capital from a foreign country, which either has no relationship to the company or is high risk.
Red flag 18: The company receives an injection of capital or assets in kind which is notably high in comparison with the business, size or market value of the company performing, with no logical explanation.
Red flag 19: There is an excessively high or low price attached to the securities transferred, with regard to any circumstance indicating such an excess (e.g. volume of revenue, trade or business, premises, size, knowledge of declaration of systematic losses or gains) or with regard to the sum declared in another operation.
Red flag 20: Large financial transactions, especially if requested by recently created companies, where these transactions are not justified by the corporate purpose, the activity of the client or the possible group of companies to which it belongs or other justifiable reasons.
Red Flags In The Choice Of Lawyer
Red flag 21: Instruction of a legal professional at a distance from the client or transaction without legitimate or economic reason.
Red flag 22: Instruction of a legal professional without experience in a particular specialty or without experience in providing services in complicated or especially large transactions..
Red flag 23: The client is prepared to pay substantially higher fees than usual, without legitimate reason.
Red flag 24: The client has changed advisor a number of times in a short space of time or engaged multiple legal advisers without legitimate reason
Red flag 25: The required service was refused by another professional or the relationship with another professional was terminated.
RED FLAGS IN THE NATURE OF THE RETAINER
Red flag 26: The transaction is unusual, e.g.: o the type of operation being notarised is clearly inconsistent with the size, age, or activity of the legal entity or natural person acting o the transactions are unusual because of their size, nature, frequency, or manner of execution o there are remarkable and highly significant differences between the declared price and the approximate actual values in accordance with any reference which could give an approximate idea of this value or in the judgement of the legal professional o a non-profit organisation requests services for purposes or transactions not compatible with those declared or not typical for that body.
Red flag 27: The client:
o is involved in transactions which do not correspond to his normal professional or business activities
o shows he does not have a suitable knowledge of the nature, object or the purpose of the professional performance requested
o wishes to establish or take over a legal person or entity with a dubious description of the aim, or a description of the aim which is not related to his normal professional or commercial activities or his other activities, or with a description of the aim for which a license is required, while the customer does not have the intention to obtain such a licence
o frequently changes legal structures and/or managers of legal persons
o asks for short-cuts or unexplained speed in completing a transaction
o appears very disinterested in the outcome of the retainer
o requires introduction to financial institutions to help secure banking facilities
Red flag 28: Creation of complicated ownership structures when there is no legitimate or economic reason.
Red flag 29: Involvement of structures with multiple countries where there is no apparent link to the client or transaction, or no other legitimate or economic reason.
Red flag 30: Incorporation and/or purchase of stock or securities of several companies, enterprises or legal entities within a short period of time with elements in common (one or several partners or shareholders, director, registered company office, corporate purpose etc.) with no logical explanation.
Red flag 31: There is an absence of documentation to support the client’s story, previous transactions, or company activities.
Red flag 32: There are several elements in common between a number of transactions in a short period of time without logical explanations.
Red flag 33: Back to back (or ABC) property transactions, with rapidly increasing value or purchase price.
Red flag 34: Abandoned transactions with no concern for the fee level or after receipt of funds.
Red flag 35: There are unexplained changes in instructions, especially at the last minute.
Red flag 36: The retainer exclusively relates to keeping documents or other goods, holding large deposits of money or otherwise using the client account without the provision of legal services.
Red flag 37 There is a lack of sensible commercial/financial/tax or legal reason for the transaction.
Red flag 38 There is increased complexity in the transaction or the structures used for the transaction which results in higher taxes and fees than apparently necessary.
Red flag 39: A power of attorney is sought for the administration or disposal of assets under conditions which are unusual, where there is no logical explanation.
Red flag 40: Investment in immovable property, in the absence of any links with the place where the property is located and/ or of any financial advantage from the investment.
Red flag 41: Litigation is settled too easily or quickly, with little/no involvement by the legal professional retained.
Red flag 42: Requests for payments to third parties without substantiating reason or corresponding transaction.
The Financial Action Task Force - FATF - Report Vulnerabilities of Legal Professionals has found evidence that criminals seek out the involvement of legal professionals in their money laundering schemes, sometimes because the involvement of a legal professional is required to carry out certain types of activities, and sometimes because access to specialised legal and notarial skills and services may assist the laundering of the proceeds of crime and the funding of terrorism. Case studies, STRs and literature point to the following legal services being vulnerable to misuse for the purpose of ML/TF:
client accounts (administered by the legal professional)
purchase of real property
creation of trusts and companies
management of trusts and companies
setting up and managing charities
administration of deceased estates
providing insolvency services
providing tax advice
preparing powers of attorney
engaging in litigation – where the underlying dispute is a sham or the debt involves the proceeds of crime.
Not all legal professionals are involved in providing these types of legitimate legal services that criminals may seek to abuse, but in some cases a legal professional may need to be involved. This makes the use of legal professionals carrying out these activities uniquely exposed to criminality, irrespective of the attitude of the legal professional to the criminality.
To keep legal professionals from becoming involved in ML/TF however, the above factors rely on the legal professionals:
being alert to red flags indicating that the client is seeking to involve them in criminal activity
choosing to abide by their ethical obligations and applicable professional rules; and
discerning legitimate client wishes from transactions and structures intended to conceal or promote criminal activity or thwart law enforcement.
Case - Legal professional participates in u-turn payments to cover up fraud – common law country
A person in control of a corporation’s financial affairs abused this position of trust by defrauding the company. The person authorised and instructed staff to make electronic funds transfers from the company to his bookmakers’ accounts. He then instructed the bookmakers to direct excess funds and winnings from their accounts to his account or third party accounts, and instructed bank officers to transfer funds from his accounts internationally. In order to layer and disguise the fraud, he instructed his lawyer to contact the beneficiary of the original international transfers to return the payments via wire transfers into the lawyer’s trust account. Approximately AUD 450 000 was returned in one international transfer to the lawyer’s trust account. The lawyer then transferred AUD 350 000 to a church fund in an attempt to further hide the assets. To access these funds the person made structured withdrawals of AUD 9 000 each within a nine day period. The suspect was charged with fraud-related offences for stealing more than AUD 22 million from the company. He was sentenced to 14 years imprisonment, with a nine-and-a-half-year non-parole period.
Red flag indicators:
• Use of corporate funds for private expenditure
• Use of the client account without an underlying transaction
• Structuring of payments
Case - Legal professional acts as cash courier and makes international transfers without underlying legal transaction – common law country An
Australian-based solicitor structured funds to an offshore account in Hong Kong. At times it was believed he actually carried cash to Hong Kong. His colleague, a Hong Kong-based solicitor, arranged for the creation of offshore companies in the British Virgin Islands and bank accounts in Hong Kong to receive structured funds from Australia. These funds were then transferred to other countries by the Hong Kong-based solicitor to hide from authorities or returned to Australia in order to appear legitimate
Red flag indicators:
• Creation of complicated ownership structures without legitimate or economic reason
• U-turn transactions
• Use of multiple foreign accounts without good reason
Case - Legal professional transfers the proceeds of a fraud through client account and attempts to purchase foreign currency to further disguise the origin of the funds – civil law country
An exchange office disclosed the purchase of a considerable amount of GBP by a foreigner for the account of company X established in Belgium. The funds for this purchase had been transferred to the exchange office’s account at the request of a lawyer with a Belgian bank account. The Unit questioned the bank where the lawyer/client held his account. This revealed that the funds on the account of the exchange office had been transferred to the lawyer’s account in order of company Y established abroad. The funds that had been transferred by company Y were used to issue a cheque to the order of company X. The Unit was informed by the bank that the transfer order was false. Based on this information the bank countermanded the cheque issued by the lawyer, and further investigation by the Unit showed that company X was managed by a foreign national who had performed the exchange transaction. This transaction for company X’s account did not have any known economic justification. Information by the tax administration indicated the company had not made its tax returns for quite some time. Police intelligence revealed that company X, its managing director and its lawyer were on record for fraud. Part of the proceeds of this fraud was used to finance the purchase of GBP by a foreign national on behalf of company X. The Unit reported this file for financial fraud related money laundering
Red flag indicators:
• Involvement of structures with multiple countries where there is no apparent link to the client or transaction, or no other legitimate or economic reason
• Use of the client account with no underlying transaction
• Use of false documents
• The client is known to have convictions for acquisitive crime