Updated Law Society guidance on AML and avoiding fraudsters
If you are considering putting together AML refresher training for staff over the summer break, you should pay particular attention to areas of practice involving litigation, to ensure your firm avoids being the victim of fraudsters or facilitating money laundering.
While Bowman v Fels provided that conducting litigation is not entering into an arrangement contrary to section 328, this did not extend to sham litigation. A perception that solicitors engaging in litigation may not be so vigilant on client due diligence has lead both money launderers and fraudsters to target law firms.
Key features of the fraud
The fraudsters will aim to make money out of law firms either by:
overpaying your fees in advance with a fraudulent or stolen cheque and asking for the balance to be returned before the cheque has cleared, or
getting the 'debtor' to pay the debt with a fraudulent or stolen cheque and ask for you to pay it to them before the cheque has cleared.
It may seem surprising that any firm would ever pay out against an uncleared cheque, especially after the Law Society specifically warned about this methodology in February 2010 and again in August 2011.
However SOCA is continuing to get reports of fraudsters attempting this methodology and have had a few firms asking for assistance to recover the funds they have paid away.
Key features of the laundering
For money launderers it is becoming more challenging to move large amounts of money around the financial system without a legitimate sounding cover story, and involving a lawyer in a payment helps to add that much needed legitimacy.
From calls to our Practice Advice Service we have seen two types of litigation specifically targeted to date: debt recovery and matrimonial law.
In the debt recovery scenario
The client presents as a director or manager in a company. They will approach a small to medium sized firm, usually through the internet or by email, and ask them to recover a debt.
Before the firm has even written the first letter of demand, they will be contacted by the debtor. The debtor will say they received a letter from the client company advising that they had now put the matter in the hands of the lawyer and provided your details to them.
The debtor sends a cheque to settle the bill in full. The solicitor pays the sum, less their fees to the client’s account.
In addition to possibly breaching the accounts rules by providing a banking facility for the clients, there is a risk that you have just moved the proceeds of crime.
In the past, the client companies were allegedly companies based in the Far East and the contractual disputes focussed on barrels of oil. More recently the range of contractual disputes is widening and the client companies are alleging that they are foreign branches of a local company – when such a branch does not exist.
For more details about this methodology see our previous warnings.
In the matrimonial scenario
Individuals, who are usually presenting themselves as foreign nationals, are contacting solicitors by email and asking them to help enforce a collaborative law agreement arising out of their divorce some years ago. They say that they believe that the other party is in your jurisdiction, provide a generic email address but no postal address for the other party, and a copy of the agreement.
Upon closer inspection, the agreement does not state the jurisdiction or court in which it was made, the lawyers who allegedly acted for each party are merely mentioned by name but no information on the firm is provided, the contents of the agreement while extending to a few pages does not actually cover anything of substance and in one case a completely different person to the prospective client was named as a party to the agreement.
This particular methodology has the attraction for the criminals of moving reasonable sums of money through a lawyers account, while also potentially giving them access to the letterhead and client account details of the firm and lawyers signatures, enabling them to perpetrate frauds against the firm at a later date.
Generally protecting your firm
Undertaking some due diligence on litigation clients, especially in unusual situations is advisable. This does not necessarily mean obtaining passports, but checking websites and company registration of both parties or previous legal representatives may be advisable if there are warning signs present in the retainer.
Ensure fee earners are aware of these methodologies and raise concerns with the MLRO at the earliest opportunity.
While these are the current trends, appreciate that any type of litigation could be used by criminals as they adapt their approach to avoid detection. Fee earners should be encouraged to look at each new retainer and ask: Why is this client instructing me? Does this make sense?
If there are warning signs, then can I corroborate any of the information provided with reputable sources – for example is the company actually listed on a company register, is the lawyer who previous acted for them able to be found on the relevant professional directory?
Ensure accounts staff are monitoring your accounts for unauthorised withdrawals which may indicate that a fraudster has misused your client account details. Have someone in the firm regularly undertake an internet search on the firm to scan for possible bogus websites of criminals pretending to be your firm.
Making reports if criminals do target your firm
Essentially in both of these cases you need to consider whether this is really a retainer you want to continue with given the risks of being defrauded.
You also need to consider whether it is ethically appropriate to ask SOCA for consent to proceed with a retainer that bears all the hallmarks of sham litigation.
Consent from SOCA to proceed will merely give you a defence to a money laundering charge, because the Bowman V Fels defence does not apply to sham litigation. It will not assist you in defending a claim if you have paid against a stolen cheque, nor will it help you in an insurance claim if you have been defrauded.
In deciding whether to make a report to SOCA, you need to consider whether you have the existing proceeds of crime. Technically, with a stolen cheque you will have the existing proceeds of crime, whereas with a fraudulent cheque you will have an instrument of crime rather than the proceeds, unless funds have been drawn down against the cheque. In practice, it is unlikely that you will know which type of cheque you have.
In this case it may be prudent to consider making a suspicious activity report (SAR) to SOCA under section 332 of the Proceeds of Crime Act. You may also wish to make a separate crime report directly to the Police or the National Fraud Authority, as a SAR is not a crime report.
It is important to remember that SOCA cannot:
advise you as to whether the cheque is stolen or fraudulent,
help you recover any funds you have paid away, or
advise you on what to do with the cheque if you decide to terminate the retainer.
While returning the cheque to the prospective client is an option, and one you may need consent from SOCA to do, the cheque itself is likely to be evidence of the crime.
Where you decide to terminate a retainer, it is prudent to consider advising the client that they should cancel the cheque with their bank as for security reasons you will not be returning the cheque to them, and then retain the cheque on the file.