Money laundering: Legal sector is high risk
It is likely that criminals launder “hundreds of millions” of pounds with the inadvertent aid of conveyancers across the UK, the government has warned.
There was also evidence of London litigation firms falling victim to money launderers posing as potential new clients based in overseas jurisdictions.
In the National Risk Assessment of Money Laundering and Terrorist Financing 2020, HM Treasury and the Home Office ranked the overall risk of money laundering involving lawyers as high.
They said conveyancing remained a high-risk area for money laundering, although there was “no evidence” that it had got worse since the previous national assessment in 2017.
Although it was “likely” that the majority of properties in the UK were bought with legitimate funds, it was also “likely that thousands of properties in London have been bought with illicit funds over the years” and “hundreds of millions are laundered through conveyancing across the UK”.
They went on: “Although further evidence is needed to ascertain geographical conveyancing risks, it is likely that criminals favour locations with high-value residential properties such as London or university towns due to high demand and potential investment return opportunities.
“However, commercial properties are also attractive for money laundering purposes, as they often carry an equally high price.”
‘Red flags’ included clients seeking anonymity by buying property through complex corporate structures based in “secrecy jurisdictions”, clients buying property without a mortgage and no “verifiable source of income”, and transactions involving multiple law firms.
Officials said they had received reports that London law firms were being “repeatedly approached by potential new clients based in overseas jurisdictions” asking them to represent their company in a dispute with a business based in the UK.
“In some instances, firms have conducted initial checks and then sent their terms. The potential client accepts these and then proposes transferring the law firm a significant sum of money as upfront payment on account.
“Days later, the client informs the law firm that they have unexpectedly resolved their dispute and request the refund of their upfront payment, minus a fee for initial time. Doing so makes this money now appear clean.”
Officials said that, as in previous assessments, there was a risk of law firms “unwittingly or willingly facilitating money laundering” while providing trust and company services.
Of the almost 25,000 UK businesses involved in this area, almost a quarter (23%) were legal services providers.
The risk of money laundering through these services could be “heightened by poor compliance with the Money Laundering Regulations”, as the Solicitors Regulation Authority had highlighted in a review in 2018, which found that more than a third of the 59 firms lacked appropriate risk assessments and some had none at all.
Misuse and exploitation of client accounts continued to be a risk. Despite strict regulatory rules, recent cases suggested that “client accounts remain at risk of exploitation by criminals and that criminals are employing methodologies such as sham litigations and fraudulent investment schemes through client accounts”.
“Money may move through these accounts rapidly and in large sums to third parties. It is also possible that criminals are using new forms of payments such as cryptoassets or crowdfunding to obscure the origins of funds.”
The assessment said recent research had suggested that the court system could also be “vulnerable to being exploited” for money laundering.
“Money could be laundered when criminals, often those from overseas jurisdictions, agree to sue each other in the English court with the payment of damages being used to launder their funds. They can also arrange to bring cases against themselves using sham companies.”
More positively, the assessment said the number of suspicious activity reports submitted by the legal services sector increased by 13% in 2019-20, compared with 2017-18, and the number had “continued to increase over the past year”.
Officials concluded that the risk of terrorist financing through legal services was low.
“We continue to assess that legal services are not attractive for terrorist financing and there remains no evidence of these services being abused for terrorist financing purposes.”
Juliet Oliver, general counsel of the Solicitors Regulation Authority, said: “Many solicitors would be horrified to find out that they had inadvertently helped criminals to launder their ill-gotten gains.
“However, the national risk assessment findings mirror those of from our own visits. Firms need to continually assess the risks they face, make sure all staff are aware of these risks, and refresh their training on a regular basis.
“If we do find evidence of misconduct that is not solved through engagement with the firm, we will take action.”
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