Contrary to popular belief, not only financial institutions are obliged to comply with money laundering regulations, but also law firms and legal professionals are subject to money laundering regulations. The main reason for this is that law firms are one of the main targets for those who want to launder money.
Money Laundering Risk of Law Firms
Money laundering is a significant risk, and ignoring this risk has huge consequences. The people involved and the techniques used in the causes of money laundering vary from case to case. Generally, large organized crime can involve more than one company, including law firms. As such, it becomes difficult for regulators to detect these crimes. So, what are the reasons why law firms are targets for money laundering and have money laundering risks? Examples of these risks and their consequences include the following factors:
- Large amounts of money handled confidentially by law firms
- Ongoing cases where law firms have failed to manage risks
- The damage caused by money laundering to the public
- Undermining public confidence in legal services
- Few reports on the detected risk
- Failure of some law firms to recognize the risks they have
- Abuse of law firms' client account
- Some property purchases
- Establishing and managing some companies and trusts
- Not defining and managing correct customer relationships
Abused Spots for Money Laundering Through Law Firms
Money launders use the systems' vulnerabilities to carry out their activities, thus aiming to prevent their transactions from being monitored and detected. For this, every sector that has money laundering risks should know its own deficits and shortcomings and prepare an AML Compliance Program accordingly. According to some experts, law firms also have some weaknesses that money launders can exploit. Examples of these weaknesses include:
Lack of due diligence
Money launderers prefer an intermediary business or contact method rather than directly transacting with institutions to hide the true source of funds from crimes. In addition, inadequate due diligence in law firms and the failure to check whether individuals who are clients of firms have links to politically exposed persons (PEPs) or organized crime are some of the weaknesses. In order to determine the real sources of funds in law firms, bank statements can be requested, and past checks of the accounts can be made.
Infiltration of law firms
According to the analysis made, it was observed that the criminals also placed someone suitable for their interests in the company for money laundering targets. Therefore, when recruiting law firms' staff, it is necessary to make due diligence at appropriate levels. When hiring staff, not making due diligence about the role can make the law firm more vulnerable to criminals' infiltration and exploitation.
Lack of proper identity checks
As with other institutions, the process of authentication is vital for law firms, so identity control is among the responsibilities of law firms to prevent money laundering. Failure to provide valid identification documents could be perceived as a red flag for money laundering. While performing identity checks, the customers' identity is verified, and whether these persons are a PEP and whether they have previously committed, such as financial crimes, should be checked. If money launderers realize that these identity checks are loose in law firms, they can take advantage of this weakness and carry out their activities.
Risk-Based Approach for Law Firms
All organizations at risk of money laundering, including law firms, must establish and comply with AML compliance programs. The most important component of the AML program is the risk-based approach. It proposes a risk-based approach for regulators, such as the FATF and the European Union, to enable liable entities to combat financial crime effectively. The simplest definition of a risk-based approach is that the organization performs AML controls according to the enterprise's risk perception and the risk level of the customers.
The RBA needs to be effectively implemented so that countries, authorities, and DNFBPs, including legal professionals, notaries, and other legal professionals, identify, assess and understand the risks of money laundering and terrorist financiers. In this way, existing risks can be effectively managed and reduced. It is wrong to see RBA as a zero failure approach. There may be situations where a lawyer takes reasonable and proportionate AML / CFT measures to identify and mitigate risks but still used for ML / TF in isolated situations.
Legal AML Requirements for Law Firms
There are some AML regulations and requirements for law firms to comply with. Regulated law firms generally have to comply with their laws under the Money Laundering Regulations 2007, the Proceeds of Crime Act 2002, and the Terrorism Act 2000. There are some obligations under these laws. for example:
- Have a designated money laundering reporting officer (MLRO) for the institution.
- The persons in charge of the institution are required to report suspicious activities to the required authorities.
- Have a system for detecting suspicious activities in accordance with the Proceeds of Crime Act 2002 and the Terror Act 2000 Customer due diligence should be performed to verify customers' identity, beneficial owners, sources of funds, and the nature of business transactions.
- Following the CDD procedures, the records must be kept within the specified period.
- Staff should be properly trained against money laundering risks and practices.
Red Flags for Law Firms
A major focus of anti-money laundering guides is red flags. Red flags are warning signs of situations where money laundering may occur. FATF identified 42 red flags for law firms in its 2013 report on Money Laundering and the Terrorist Financing Vulnerabilities of Legal Professionals. These red flags generally focus on due diligence, such as customers, funding sources, and lawyers' selection. After red flags are determined in a law firm, some transactions take place in accordance with its legal and regulatory obligations. For example, requesting additional information from customers or other sources, cross-checking different information types, creating Suspicious Activity Reports (SARs) for suspicious transactions, terminating customer relationships.
Customer Due Diligence Requirement in Law Firms
Customer Due Diligence (CDD) is also the control procedure applied when making a risk assessment for customers. CDD is one of the basic requirements of the risk-based AML approach, and it has been deemed necessary and recommended by all regulators in the world within the scope of anti-money laundering activities. CDD measures require to really know the customer and know their activities, and it is a background check process in accordance with the legislation. The implementation of CDD procedures aims at law firms to identify their clients' risks and protect themselves from money laundering and terrorist financing crimes.
When we look at the regulations and obligations set for law firms, it is necessary to take CDD measures. CDD measures are ideal for medium-risk customers, but Enhanced Due Diligence (EDD) measures should be taken for high-risk customers such as PEP. EDD is a KYC process that allows higher-risk individuals or high-risk companies to be examined.
Sanction Scanner Solutions for AML Firms
Necessary customer checks and identity checks are required in law firms. When checking customers, one should look at who they really are and whether they are PEP or whether they are on any sanction lists. Adverse Media screening should also be performed for these customers. Sanctions and PEP lists are growing and changing day by day. Due to these data's dynamic nature, manual sanctions, PEP, and Adverse Media data screening become very difficult and insecure. However, with the Sanction Scanner's sanction and PEP Screening Service, law firms can meet global and local AML obligations and be protected from legal penalties.
In addition, with our AML Screening and Monitoring tool, law firms can easily perform Customer Due Diligence, Enhanced Due Diligence, Know Your Customer procedures in accordance with all obligations. All operations also provide Sanction Scanner strong API support. With Sanction Scanner, scans can also be done in seconds via the web, API, or batch search. Moreover, companies can have all the features of the Sanctions Scanner at no additional cost. Let's! for detailed information, contact us, or request a demo.
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