Why identity checks won’t make you AML compliant

It’s estimated that £6.7 billion of criminal money is laundered through the UK property sector. As the property market is a prime target for criminals, conveyancing firms face significant risks when it comes to laundering money, so they have a crucial role to play in detecting and preventing this type particular of criminal activity.

Unfortunately, it’s often assumed that running know your client (KYC) and identity validation (ID&V) checks will spot these criminals and keep your firm anti-money laundering (AML) compliant. They won’t – as we’ll explain below.

Why conveyancing firms are at risk

Conveyancing firms face a higher risk of money laundering due to the high-value nature of property transactions. Some factors that contribute to the money laundering risks for conveyancing firms include:

1. Property purchases usually involve large sums – often hundreds of thousands or millions of pounds. This makes them ideal for cleaning a lot of dirty money in one go.
2. Many transactions have an international element such as foreign buyers and offshore companies. This adds complexity and makes tracing funds harder.
3. Cash purchases, although less common, provide an easy way to launder money with minimal audit trail.
4. Rental properties give criminals a regular payout of clean money, making this an ideal way to take advantage of the proceeds of their crimes.

There’s sometimes a perception that AML regulation in the legal sector generally, and in the conveyancing sector in particular, is not as rigorous as banking or other regulated sectors. This is not the case.

In fact, failure to comply with AML regulations can result in severe penalties, reputational damage, and even criminal prosecution for firms and partners.

Real-world example

The Solicitors Regulation Authority (SRA) has warned that conveyancing firms are at high risk of being exploited by criminals. This is one of four case studies involving property, taken directly from the SRA’s dedicated page:

Solicitor’s judgment clouded by longstanding client

The following case illustrates how criminals can ‘groom’ solicitors by building their trust before involving them in money laundering.

Background

Mrs A has practised as a sole practitioner for fifteen years. Mr Z, a longstanding client, asks her for help in selling his house.

Mr Z arranges to sell the house at half of its value. Mrs A finds this odd, but Mr Z explains he is in financial difficulties and can no longer keep up with mortgage payments.

Prior to this, Mrs A has only acted for Mr Z in commercial matters. The police had contacted Mrs A one year ago to advise that they suspected Mr Z of being involved in trading illicit drugs. They served her with a production order, requiring her to report certain information if Mr Z instructed her on any property transactions.

However, Mrs A is trusting and naive. She believes her client is genuinely in financial difficulties. She sympathises with his situation and wants to help, so she proceeds with the sale without alerting the police.

It later emerges that Mr Z has indeed been involved in selling drugs and is subsequently convicted. He had sold the house in a hurry as he was facing confiscation proceedings.

Outcome

Mrs A is convicted for failing to disclose that she had reasonable grounds to suspect her client was engaged in money laundering. She allowed her trust in her client to prevent her from carrying out due diligence on an unusual transaction.

When she appears before the Solicitors Disciplinary Tribunal, the judge acknowledges Mrs A’s unblemished regulatory history and the fact that she has not made any personal gain. However, her offence is of a serious nature so she is struck off and ordered to pay costs.

The red flags in this case are that the transaction instructed by the client was unusual – the price the house was being sold at was unusually low, the sale was potentially loss making, and the type of transaction did not fit the pattern of previous instructions from the client. The client was also suspected of having criminal associations.

You can read more case studies involving property and conveyancing on the SRA website.

What are your legal obligations?

Conveyancing firms cannot afford to ignore or downplay their risks. You have several key legal obligations when it comes to AML compliance, beyond running KYC and ID&V checks.

These obligations stem from regulations such as The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, The Proceeds of Crime Act 2002 and The Terrorism Act 2000. The Legal sector affinity group guidance ( LSAG), also advises on how to apply these regulations to your own firm.

Broadly speaking, you must have in place the following.

AML leadership

If you have a leadership team, you need to assign people with AML knowledge and gravitas to the roles of Money Laundering Compliance Officer (MLCO) / Money Laundering Compliance Principal (MLCP), and Money Laundering Reporting Officer (MLRO). The MLCO/MLCP are ultimately responsible for the day-to-day AML, while the MLRO is the gatekeeper for internal suspicious activity reports (SARs), amongst other responsibilities. Sole practitioners must take on both roles.

Ongoing employee training

This must include all employees and agents, including management, and teach them about: their legal obligations, your specific AML policies, controls and procedures (PCPs), and guidelines for identifying and reporting suspicious activities.

Written, tailored PCPs

These must be detailed and bespoke to your firm, so they consider the unique risks your business faces. These should cover customer due diligence, suspicious activity reporting, risk management and more.

Risk assessments

Up-to-date risk assessments for your entire business, individual service lines and each client offer insight into your risks and need to inform your AML PCPs. As risk is dynamic, any changes in your operations or client base should lead to updating your assessments.

Recent client information

You need to identify and verify all clients, clarify beneficial ownership and screen them against sanctions, politically exposed persons lists and adverse media. Remember: this is only a fraction of your AML compliance.

Records of your AML

If it’s not written down, it didn’t happen. Documentation is your primary defence. Maintain comprehensive records of all AML actions and decisions, not just as a regulatory requirement but as a critical component of your protective measures.

A process for suspicious activity reports (SARs)

Your AML obligations are in place, partly, so you have the necessary information to report suspicious activity. Employees need to submit an internal report to your MLRO. The MLRO’s role is to evaluate these reports and decide on external submissions to the NCA. If they decide not to report to the NCA, their reasoning needs to be written down and a record kept.

A proactive approach

AML isn’t a one-off task. Regular updates to your policies, training and risk assessments ensure your firm stays aligned with evolving regulations and sector guidance.