AML Guide for Law Firms
This guide will provide an overview of how Law Firms are affected by Money Laundering, which regulations need to be taken into consideration, as well as compliance best practices.
Significance of AML for Law Firms
Even though law firms are not financial institutions, lawyers are still vulnerable to being used for money laundering activities. Perpetrators may look to hire legal services to make their illicit financial, corporate, or real estate transactions look legitimate.
For instance, they may use the professional status of lawyers to enhance the legitimacy of real estate transactions or hire them to create shell companies to funnel money through. By concealing the connection between perpetrators and the proceeds from their crimes, money laundering is facilitated.
Simply put, a lawyer can unknowingly be involved in money laundering activities when they are used to deposit, transfer, or withdraw funds.
As criminals continue to use complex schemes and transactions to launder money, lawyers have an increased ethical obligation to not support or facilitate illegal activities.
What Obligations do Law Firms Have?
The Bar Association and other law societies across the globe actively support AML efforts and provide guidelines for due diligence and awareness of potential money laundering issues.
Members of the profession have the responsibility to ensure to not only understand their AML obligations but also to create processes and procedures to deter money laundering. Law firms should thoroughly understand their ethical obligations and train their staff to be able to identify complex transactions that could be of high risk.
If necessary, law firms should take appropriate action if they suspect a client – or potential client – is laundering money or participating in terrorist financing.
Depending on the regulations in your country, you may be required to dissuade the client from following through with their proposed plan of action, take the matter up through the chain of authority at the law firm, or report it to the proper authorities. In some cases, your only option may be to refuse to act.
Similarly, lawyers must properly identify clients when business relationships are being established for certain high-risk transactions. They must also identify their clients when money laundering or terrorist financing is suspected, or if there are doubts are surrounding the adequacy of the identifying information presented.
If the client is a business or other organization, not only must a lawyer identify the client, but also the beneficial owners.
Every jurisdiction has its regulations, and some do not have any formal laws imposed on lawyers. For instance, in the EU law firms are directly subject to AML regulations – but in the US, they are not mandated by law to comply.
However, this does not mean that they are exempt from doing their part to prevent money laundering and terrorist financing. In the US, lawyers are prohibited from retaining a fee from illicit funds, receiving $10,000 or more in cash without filing a currency transaction report, or transacted with a known terrorist, drug traffickers, or other prohibited persons.
Best Practices for Law Firm AML Compliance
The International Bar Association – IBA – has set forth best practices for law firms to minimize the risk of being used for money laundering or terrorist financing. Even in jurisdictions where there are no direct AML obligations, lawyers may still face criminal or civil liability if they participate in a money-laundering scheme – unwittingly or not.
Customer Due Diligence
The IBA recommends that lawyers conduct customer due diligence at the start of every new business relationship. They should also continue this on an ongoing basis so that they become aware of any unusual behavior or suspicious funds.
Identify the client and all beneficial owners by using independent, reliable source documents. Similarly, be sure to thoroughly understand the business relationship and the intended outcome of the transaction that your services will be used for.
Here are some red flags that should prompt additional due diligence measures:
- Using unnecessary intermediaries
- Avoiding personal contact with no explanation
- Reluctance to disclose information data necessary to complete the transaction
- Providing counterfeit or false documentation
Carefully Assess Risks
Assess high-risk areas and activities within the law firm. Which services are more vulnerable to being used for money laundering?
The Financial Action Task Force, or FATF, has identified certain legal services that are especially vulnerable to criminal misuse. These legal services are at higher risk, so processes should be put in plays for lawyers involved to be able to detect suspicious activity:
- Sham litigation
- Complex real estate transactions
- Management of companies, trusts, and charities
- The use of client accounts
Ensure Proper Record keeping
As a law firm, proper record keeping is an essential part of AML compliance. Lawyers should keep all relevant records, such as those used as part of your customer due diligence measures. This also includes correspondence and business files – even after the business relationship has ended.
According to FATF, the time documents should be retained is 5 years after the occasional transaction – but some states require that you retain certain client records for 5 to 7 years.
The documentation that is retained should be sufficient enough to reconstruct individual transactions, so it must include the type of currency and specific amounts involved. This will allow the information to serve as evidence if needed to prosecute a money launderer.
Balancing AML Compliance and Confidentiality
Often there is tension between AML compliance and client confidentiality. Lawyers must maintain confidentiality and act in their client's best interests. In some countries, clients cannot even waive this right.
In some cases, lawyers are protected when they share suspicions about money laundering and terrorist activities with the authorities, in good faith. You should put processes in place to your terms of engagement that track these protections, so you are contractually protected from civil liability if you report suspicions in good faith.
Law firms cannot tip off their clients when suspicious transaction reports are submitted, so lawyers must do their best to avoid doing so without failing to put the client first.
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