Law Society guidance on conveyancing transactions and AML
The money laundering obligations are not the only compliance obligations which lawyers and banks need to consider when transferring funds.
While money laundering requirements are aimed at preventing the flow of illicit funds, the UK’s sanctions regime prevents the use of all economic resources by or for the benefit of a designated individual, either directly or indirectly.
Such use is a criminal offence, unless the person had a licence or had no reason to believe that the designated person was on the sanctions list.
In practice this means that it is irrelevant if the money is legitimate or that the client wants to use the funds for a legitimate purpose. Further, designated individuals can be resident in the UK and domestic transactions are covered.
Finally, it is not only funds being paid in that a solicitor has to consider, but also funds that they are paying out.
The Financial Service Authority has increasingly been taking action against financial and credit institutions for poor sanctions screening programmes, resulting in more banks taking steps to screen not only the remitter and recipient of the funds, but also the reason for payment against sanctions lists.
Often when transfers are made between solicitors, one or both client names will be included in the reason for payment to ensure that the funds are allocated to the correct file.
If the client’s name triggers an alert on the sanctions screening process, the bank may need to seek further details from the solicitor to ensure that they are not breaching the sanctions regime.
Who is on the sanctions list?
There are over 7,000 entities and individuals on the UK consolidated sanctions list, including British citizens and foreign nationals, making it difficult to confidently categorise the types of clients who may be sanctioned. However, the sanctions are generally based around particular jurisdictions or regimes, so that is a useful starting point in assessing whether there is a greater chance that the client might be on the list.
Some of the key sanctioned jurisdictions at present are: Iran; Egypt; Lebanon; Syria; Libya; and Zimbabwe.
You can locate a full list at www.hm-treasury.gov.uk/fin_sanctions_currentindex.htm
Late last year the UK government extended its sanctions in Iran to prevent all UK credit and financial institutions from having a banking relationship with banks in Iran, effectively prohibiting the transfer of funds between these two countries.
What can you do?
There are several things you can do to minimise potential disruption to property transactions caused by sanctions screening.
Look at your own compliance with the sanctions list
Some solicitors are still unaware of the sanctions regime and which clients it may affect. Take the time to familiarise yourself with the relevant section on the HM Treasury website and review the types of jurisdictions and individuals on the sanctions list.
In light of this information consider whether your client demographic is more likely to be represented on the sanctions list such that you should incorporate sanctions screening as a regular part of your client due diligence processes.
Factors to consider include whether you regularly have:
clients or transactions with links to jurisdictions subject to sanctions, even if the clients are based locally, and clients or transactions involving senior political persons from jurisdictions subject to sanctions.
If it is appropriate to undertake regular screening, most e-verification providers incorporate this check into their service, alternatively you can check directly against the list.
The latter may be an appropriate case-by-case approach where your firm has a low general risk of being retained by clients on the sanctions list, but an individual client presents higher risk indicators.
If you find that you have a client of the sanctions list, you will require a licence from the Asset Freezing Unit and this can take some weeks to obtain. Therefore it is vital that sanctions checking is considered early on in the retainer, rather than at the time you want to send funds for completion.
It is important to remember that consent from SOCA is not sufficient.
Read more about obtaining a licence in the Law Society practice note.
Understand your bank’s approach to sanctions screening
In the event that your client triggers a sanctions alert with your bank, clear communication lines are likely to help minimise the disruption.
If the client is actually on the sanctions list, both you and the bank will need a licence to proceed and it is best to start coordinating this as early as possible in the transaction.
Take the time to identify the key contact at your bank to discuss sanctions concerns with and ensure that the MLRO and their deputy are similarly listed as appropriate contacts with the bank..
There are no tipping off provisions relating to sanctions compliance, and the sanctions list is a public document, so you can have open discussions with the bank and with the client.
Ensure you can provide identity information to the bank promptly
Banks will sometimes have the problem that a client’s surname triggers a false positive result on their sanctions screening programme. By providing your client’s full name rather than just initials, you will assist them to identify false positive hits more quickly and continue processing the payments.
Even with this extra information, sometimes the bank will ask for identity evidence from you in order to confirm that the client is not the person they have found on the sanctions list.
You will need explicit client consent for this, rather than just burying it in your terms and conditions.
You may either contact the client at the time of the query from the bank or, to expedite the process, you may consider asking all conveyancing clients at the start of a retainer for permission to provide identity details and/or documents to the bank in response to queries about fraud, money laundering or sanctions.
Take care not to engage in circumvention activities
While a simple solution of replacing the client’s name with the client reference number may suggest itself, there are associated risks with this course of action.
The first and most obvious risk is that the accounts staff at your firm or the other firm get confused as to which reference number applies and cannot allocate the funds to the correct retainer.
A more significant risk is a possible breach of the circumvention provisions for the relevant sanctions regime. If your removal of client details are designed to or enable people to get around the sanctions provisions, you may be charged with an offence of circumvention and face a penalty of up to 2 years jail.