The legal sector is a common target for money laundering.
Large sums of money are exchanged on a daily basis, serving as a primary target for unlawful professionals and clients who wish to exploit an opportunity.
These risks are particularly prominent within probate, where many actions can be taken by employees and clients in an effort to cheat the system.
Under the Code of Conduct, all solicitors have a duty to ensure that their firm has sufficient safeguards and systems in place which comply with anti-money laundering legislation.
Further, the Fourth Anti-Money Laundering Directive, brought into UK law last year saw more targeted efforts made to reduce and prevent the offence taking place.
Commenting on the purpose of the Directive was Emily Deane, Technical Counsel of STEP. She drew attention to the relevance of its aims, particularly in light of recent global events.
‘The Fourth Anti-Money Laundering Directive aims to update and enhance the EU’s anti-money laundering and terrorist financing laws. Following the Paris attacks in 2015 and subsequently the Panama Papers leak the EU felt compelled to accelerate the Directive in order to combat crime relating to tax evasion and terrorist financing.’
The Directive also aims to modernise the Money-Laundering Regulations 2007, referencing online payments as well as introducing obligations regarding transactions and trusts.
For the wills and probate sector, the key here is the ‘risk-based’ approach, which sets out that there is a higher duty of care owed when there is a higher risk of money laundering. This is in terms of conducting due diligence in order to discharge liability. For businesses in the sector, this is of particular significance, as due diligence must be carried out on trust beneficiaries, trustees, as well as anyone included in the expression of wishes.
Appropriate assessment of risk is contained within section 18, which sets out that ‘the relevant person must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject’. In addition to the information made available by the relevant authority, it also highlights a number of risk factors which should be taken into account.
This includes the location, the product or services, as well as its delivery channels. However, it also states that size and nature of business should also be considered, meaning that the appropriate assessment required will be decided on a case by case basis.
Commenting on ID checks and anti-money laundering steps required within the profession was Charlotte Ponder, Legal Director at Countrywide Tax and Trust Solutions Ltd. Whilst acknowledging the importance of mitigating the risk, she highlighted the need for greater consistency as well as a more proportionate approach.
‘I accept that it has to be done and is part of the process, but for clients and advisors across the sector, surely it is time for
- a) some consistency and
- b) for us to concentrate our efforts where risk actually exist.
‘I am constantly staggered at how difficult it is for clients to assign life policies into Trust for example. They have to give providers certified ID for both themselves and their trustees in order for this to be successful. After all that, it’s simply for something where money is unlikely to be paid out anyway, and if it does, everyone will need to provide up to date ID. The hassle involved just deters clients from wanting to do the work, and it’s vital that they do so.’
Charlotte also drew attention to the variation of requirements across the sector, a factor which can be confusing for both clients and advisers.
‘Most of all I see different requirements from different institutions, which makes it hard for clients and difficult for those advising them. Why do some accept copies, and others only ones that are certified? Why can’t we as the advisers apply some consistency across the board? That way, we can make everything as easy as possible for the person at the heart of all this – the client. We want them to engage in the process and tidy up their affairs, and to do this we should be trying to make things as easy as possible for them.’
The regulations also aim to prevent the anonymous trusts funding criminal purposes, given that they are a common target of crimes such as money-laundering. HM Revenue & Customs aim to curb this risk by establishing and maintaining a register of all tax generating express trusts in the UK, placing an additional burden on trust beneficiaries and trustees on an administrative level. As Emily Deane highlights, improvement of the information available on beneficial ownership, particularly in terms of information exchange between the relevant authorities.
‘The UK has implemented a beneficial ownership register known as HMRC’s Trust Registration Service which obliges trustees to maintain an up to date register of beneficial owners of trusts with UK tax consequences. The information is not publicly available and is only accessible by HMRC who can exchange it with law enforcement authorities in the UK or other member states.’
Whilst the current register is only accessible to the authorities and HMRC, it is possible that this could change in the future, with the prospect of a publicly accessible one on the horizon. However, as Emily acknowledges, it may be a while before this is introduced.
‘Looking to the future it is possible that the Fifth Anti Money Laundering Directive, which is already underway, could enforce a public register. However, this is currently receiving significant resistance from the UK and other Member States, so whether it will in fact become a reality is yet to be seen.’
Amended on the 26 June 2017, the outcome of the government’s consultation on the legislation provided detail on how the 4MLD will impact those involved in the sector, as well as trustees.
It details the aims of the government when considering the nature of information to be collected, highlighting the importance of the right balance being struck between combating trust misuse and reducing the burden on trustees.
The main aim of collecting certain information is for law enforcement and HMRC to draw links between parties related to a particular trust asset. Therefore, this would improve the ability of these organisations in identifying suspicious activity and being able to intercept it at an earlier point.
Regardless of function, Article 31 of the 4MLD requires any express trust with tax consequences to be registered. Under the legislation, this means any trust which was deliberately created by a settlor, expressly transferring property to a trustee for a valid purpose.
In light of this, where there is a transfer of the legal ownership of property from settlor to trustee, investment trusts are not the same.
“Tax consequences” refers to UK liabilities for numerous types of tax including capital gains tax, non-resident capital gains tax, income tax, inheritance tax, stamp duty reserve tax or stamp duty land tax.
As well as trusts with a UK tax liability outside of the UK, UK resident trusts with UK tax liabilities will be required to register.
Although contracts, wills and testaments will not need to be automatically registered, they will need to be if they create an express trust. Where this is the case, if a trust generates a tax consequence, the beneficial ownership information of the trust would need to be reported to the HMRC.
For trustees, information on the identity of the following individuals will be required:
- Other trustees,
- Beneficiaries
- Settlors
- Other natural or legal persons exercising control over the trust
- Other persons identified in a document or instrument relating to the trust (including a memorandum of wishes)
The required information to be provided is:
- Name
- Correspondence address or contact details
- Date of birth
- National Insurance Number if they are resident in the UK (or Unique Taxpayer Reference if non-individual)
- Passport or ID number with expiry date and country of issue if they are not resident in the UK
However, it will not be necessary to provide this information if a trust has a class of beneficiaries where not all have been determined. Trustees will instead be required to provide a description of the class of persons who are entitled to benefit.
General information on the nature of the trust will also be needed:
- Name
- Contact address
- Date of the trust’s establishment
- Statement of accounts describing assets
- Country of residence for tax purposes
- Place of administration
The statutory instrument can be accessed here.
For those in the sector, the Proceeds of Crime Act 2002 also contains several sections of particular interest which aim to curb the risk of money laundering – one of which only came into effect at the end of last month.
Drawing attention to these was Rachel Spearing, Barrister at Law at Serjeants’ Inn Chambers. She highlighted particular sections of the legislation which could result in the consequences of money laundering applying to third parties.
‘With regards to money laundering, one particular aspect to consider may be the potential ‘vulnerability’ of those seeking to inherit or transfer money which may be deemed ‘suspicious’ or part of a transaction under section 327-329 of the Proceeds of Crime Act (POCA) 2002. Funds transferred by those seeking to launder criminal property, which may consist of any property real or cash by way of gift, trust or inheritance could fall under POCA provisions which provide culpability upon a person who transfers, receives, acquires or facilitates in their transfer, to demonstrate that they did not ‘know’ or ‘suspect’ them to criminal property. Therefore, potentially innocent third parties (lay & professional) may be touched by laundering aspects.’
Rachel goes on to acknowledge the recently introduced ‘unexplained wealth orders’, which require someone to explain the source of their wealth if there is a reason to suspect corruption. Government guidance states that this would be ‘where there are reasonable grounds to suspect that the respondent’s known lawfully obtained income would be insufficient to allow the respondent to obtain the property.’
Part 8 of the Proceeds of Crime Act, the civil investigatory powers allow the government to withhold assets until they are accounted for.
Highlighting the need for professionals to keep up to date with risk management, Rachel went on to state: ‘Professionals and in some cases, even lay clients need to be aware of the robust responsibilities of money laundering risk management and safeguards. What was historically overlooked where ignorance or poor due diligence became evident may now be prosecuted by Regulatory Authorities. More importantly, those who believe they have absolutely nothing to do with any impropriety may find themselves being investigated and subject to a ‘disclosure order’ or ‘restraint’ which may be highly challenging for business, personal and reputational reasons.’
Whilst it’s clear that the risk of money-laundering remains prominent, collaborative efforts between the Government and professionals to take preventative measures is surely a step in the right direction. However, it’s yet to be seen whether the introduction of regulations such as the 4MLD will be enough, especially at a time of great change.
