By Legal Futures Associate SearchFlow
Every Property Law Solicitor and Conveyancer knows that carrying out an Anti-Money Laundering (AML) check before taking on a client is crucial to ensure compliance. AML checks help to prevent illegal activities such as money laundering and terrorist financing within conveyancing transactions. The volume of transactions and high property values, especially in London and the South East, mean that Property Law Solicitors and Conveyancers must mitigate money laundering risks. Failing to comply with AML regulations can have significant and wide-ranging repercussions. SRA CEO Paul Phillip illustrated this in the SRA’S Annual Report for 2022-2023:
“In the last year, we have brought enforcement action against a combined total of 47 firms and individuals. This includes £137,402 in fines (either levied by us or the Solicitors Disciplinary Tribunal), one individual suspended, and one individual subject to controls being placed on their employment. In the most serious cases, where we suspect money laundering has taken place, we make reports to the National Crime Agency. In the last year, we submitted 24 suspicious activity reports relating to assets totalling more than £75m.”
The SRA has dramatically increased its efforts to combat financial crime. Between 2022 and 2023, they increased their resources to perform proactive inspections of 177 firms and performed 73 desk-based reviews. Mr Philips stated in the watchdog’s annual report:
“Through our proactive work, we generally seek to provide advice and ensure firms are complying with their obligations. That said, where we find serious or widespread issues, we will take robust enforcement action.”
Given that preventing money laundering is a high priority for the SRA, below is a helpful reminder about the essential details that you need to know before carrying out an AML check:
What is a risk assessment?
There are two kinds of risk assessments. The first is your firm’s over-arching risk assessment. This document must identify and assess inherent risks your business can reasonably expect to face from money laundering and terrorist financing. It’s based on the type of work or service you provide. It should describe the policies, procedures and controls your company has in place to enable effective monitoring, management and mitigation of any risks you have identified. Regardless of the size of your firm, you must have a written risk assessment in place, and it must be kept up-to-date. The SRA demands that regulated firms can produce the risk assessment upon request.
Once you have defined the above, you need to consider the second kind of risk assessment, which looks at the risk factors relating to your client. This is where AML checks on individual clients come into play.
What is an AML search?
An Anti-Money Laundering search (or AML for short) is a compliance check carried out against a person, through a Personal AML Risk assessment, or a company, through a Non-Personal AML Risk Assessment, to confirm they are who they say they are.
There are three types of AML searches – Simplified, Standard, and Enhanced.
Simplified due diligence is typically for ‘low risk’ work or transactions and requires a risk assessment, documentary evidence of the client’s identity and address, and electronic screening of financial sanctions, specially designated nationals and politically exposed persons data.
Regulation 37(3) of the Money Laundering Regulations 2017 sets out a list of factors to be considered in determining whether a situation poses a lower risk of money laundering or terrorist financing. If you decide to use simplified due diligence, you must provide a reason and obtain and document the evidence you analysed to make this decision.
Standard due diligence is covered under Regulation 28 of the Money Laundering Regulations 2017. The measures required to complete an AML check will vary depending on the type of client involved. This level of due diligence should be applied to low-risk matters (where simplified due diligence is not applicable) and medium-risk matters.
Enhanced due diligence, on the other hand, is typically for high-risk work or transactions. Regulation 33(1) of the Money Laundering Regulations 2017 sets out circumstances in which enhanced due diligence measures must be applied. It includes any transaction or business relationship involving:
- a person established in a high-risk third country
- a politically exposed person (PEP) or a family member or known associate of a PEP
- any other situation that presents a higher risk of money laundering or terrorist financing (for example, sanctions)
Regulation 33(6) also sets out a list of factors you must consider when assessing whether there’s a higher risk of money laundering. However, it is vital to look at each client individually, as even if a client does not meet one of the above criteria, they may still require an Enhanced Due Diligence check.
An Enhanced Due Diligence (EDD) check requires, as a minimum, that you examine the background and purpose of the transaction and increase the monitoring of the ongoing business relationship. Regulation 33(5) gives a non-exhaustive list of ways you can conduct EDD.
What is a PEP or Sanction?
A politically exposed person (PEP) is someone who has been appointed to a high-profile position within the last 12 months, such as a head of state, head of government, government minister, high-level judicial bodies, as well as the families of those who fill these positions. A complete list of roles considered to be high-profile positions can be found here.
Due to the nature of the work involved with these positions, these persons are considered to pose enhanced risks, and therefore, firms are advised to carry out enhanced due diligence checks.
The UK government defines sanctions as restrictive measures that can be put in place to fulfil a range of purposes, including complying with UN and other international obligations, supporting foreign policy and national security objectives, as well as maintaining international peace and security, and preventing terrorism.
Sanction checks ensure you do not become involved with sanctioned entities so you can avoid the risk of non-compliance penalties and protect your firm’s reputation in the process. If your client is a PEP and you’re concerned about this, you can discuss this with your Money Laundering Reporting Office (MRLO.)
There is also extensive guidance issued by the SRA on sanctioned persons and what to do if a client becomes sanctioned.
Knowing your client: What can be used as identity and address documentation?
All Solicitors have a duty under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 to identify and verify the identity of their client.
As per the Legal Sector Affinity Group AML guidance, identification verification should “be completed on the basis of documents or information which come from a reliable source, independent of the client. You need a reliable source(s) to verify your client’s identity, which is independent of the client e.g. a passport or driver’s license, or, in the case of a corporate entity, evidence of registration from the relevant registry or reputable company services provider. You are permitted to use a wider range of sources when verifying the identity of the beneficial owner and understanding the ownership and control structure of the client.”
The Law Society advises that it is essential to know what documents you can accept as evidence of identity and recommends using an electronic third-party verification solution to fulfil this part of the process. As such, it is now commonplace to outsource this step in the verification process to a third-party provider. For proof of address, utility bills and mortgage statements are commonly accepted by search providers. Additionally, various identity documents can be used for an AML check on your client, such as a photo driving license and current bank statements.
Your legal obligations involve ongoing monitoring of your clients as they progress through the transaction, therefore, third-party verification systems often reduce the hours spent monitoring PEP lists by providing notifications if anything changes.
If you’re unsure whether a particular form of documentation meets the requirements, it’s advisable to consult your search provider. If you’re handing your own CDD, consider speaking with your compliance officer or reviewing guidance set out by the Solicitors Regulation Authority for further assistance (SRA).
Who can carry out an AML search?
AML searches can be carried out by any staff members who have received proper training in Anti-Money Laundering procedures and are usually assessed by the firm’s Money Laundering Reporting Officer (MRLO) or designated compliance officer.
Regulation 24 of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 provides that relevant people and agents are made aware of the law relating to anti-money laundering and terrorist financing and regularly given training in how to recognise and deal with transactions and other activities or situations which may be related to money laundering, terrorist financing or proliferation financing. In addition, a record must be kept of the training provided.
Compliant and Non-Compliant results: What does this mean?
If a check is returned as Compliant, you will typically not need to take any further action, as the provider has found nothing of concern regarding the individual or company.
However, if the check is returned as Non-Compliant, the provider has found potential risk factors regarding the individual or company, such as the individual appearing on a sanctions list or other alert data source; you will need to assess the potential risk you may face with that particular client. To aid you in determining any possible risks, contact your search provider for further details as to why the check has returned as Non-Compliant. You can also ask your client for further identity information to help confirm or rule out whether the match to the sanctions or alert data is accurate.
A Non-Compliant result may also be returned when insufficient independent data is available to confirm the person’s identity.
If you are unsure of whether to proceed with a client’s case, speak to your firm’s Money Laundering Reporting Office (MRLO.)
Final considerations
Whether you’re onboarding a company or an individual, carrying out correct AML checks and implementing robust risk assessment processes and procedures will ensure you remain compliant with statutory and regulatory requirements. SearchFlow provides a comprehensive residential and commercial fraud and ID dashboard to help you to manage client risk in a transparent and organised way, making file management and auditing easy and efficient. . In addition, SearchFlow has several resources to help you manage risk, including an AML best practice guide.
