Assessment of international and domestic risks of money laundering and terrorist financing affecting Scottish solicitors (May 2017)

Transcription

1 1 Law Society of Scotland Assessment of international and domestic risks of money laundering and terrorist financing affecting Scottish solicitors (May 2017)

2 2 Index Introduction 3 Overall Conclusion 4 Linking Risk to Inspection activity 5 Key Threats, Vulnerabilities & Mitigations for the Scottish solicitor profession Background Material (Summarised) Scotland s Serious Organised Crime Strategy (June 2015) HM Treasury/Home Office UK national risk assessment of money laundering and terrorist financing (2015) National Crime Agency High End Money Laundering Strategy (Dec. 14) National Strategy Assessment of Serious and Organised Crime 2015 Financial Action Task Force (FATF) Money Laundering Vulnerabilities of Legal Professionals 2013 CCBE A lawyers Guide to Detecting and Preventing Money Laundering Summary of Scottish solicitor responses to NRA 2017 exercise

3 3 Introduction Under Regulation 17 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the Law Society of Scotland ( as an AML Supervisor) must identify and assess the international and domestic risks of money laundering to which its members are subject. In carrying out such a risk assessment supervisors should take into account various reports and guidelines issued by authorities such as the European Supervisory Authorities, HM Treasury and Home Office. This risk assessment utilises the above reports (where available) and other relevant material to arrive at an assessment of the money laundering risks faced by Scottish solicitors analysed according to factors such as firm size and services offered by firms. We have also been able to take into account input to the ongoing Home Office/HM Treasury exercise to update the NRA in Thirty six Scottish solicitors from a broad range of firms completed the NRA 2017 questionnaire. The risk assessment is intended to assist the Law Society of Scotland to cluster solicitor firms according to risk to enable effective inspection prioritisation. It is also hoped that this document will assist solicitors in their own firm risk assessments which are also required by the regulations. This risk assessment will be updated in November 2017 to review the impact of individual firm risk assessment information gathered to that point.

4 4 Overall Conclusion The Law Society of Scotland agrees with the conclusion of the National Risk Assessment that the legal sector is inherently exposed to a high level of risk due to the facilities, skills, services and products offered by the sector. We also welcome the NRA s clear statement that the vast majority of solicitors will not be involved in money laundering activity and will instead be compliant or trying to comply. Not all practitioners will face the same level of risk which will vary according to the quality of/adherence to firm policies and procedures, services offered, location etc. The Law Society of Scotland works extensively to mitigate the AML/CTF risk faced by the Scottish solicitor profession, particularly through its extensive programme of AML compliance inspections. Work by the Scottish Government and UK Government agencies sets out the extent of serious and organised criminal activity both in Scotland/UK and internationally. Work by the Financial Action Task Force (FATF) and the CCBE sets out the ways in which these criminals will aim to use solicitors to launder criminal funds. Evidence from UK Government agencies and the experience of the Law Society of Scotland both confirm that a small minority of small firm practitioners will be at most risk of non-compliance with AML/CTF requirements. Larger firms may face higher levels of risk to the extent that they deliver more complex services (eg: including international aspects) and such firms will need to have robust controls in place to manage the high levels of inherent risk that many face. External evidence and the experience of the Law Society of Scotland also confirm that AML/CTF issues will most commonly arise on property transactions and the misuse of client accounts. Work provided by solicitors acting as trust and company service providers also pose a significant CTF/AML risk. The Law Society of Scotland will reflect the above broad risk themes in its AML/CTF inspection planning ensuring that inspection frequency is varied with risk according to firm size and type of service offered. Very low risk firms may not receive an inspection. However it should be noted that as most Scottish solicitor firms are small/medium, hold client accounts and offer property/tcsp services, the themes identified in the NRA are of limited value in differentiating individual firms according to risk. The Law Society of Scotland recognises that further work is necessary to build up information to allow more detailed risk profiling of firms within the above broad categories. This work is already advanced for our largest firms and proportionate exercises will now be taken forward for small and medium sized firms. This will enable more detailed profiling and greater variation on inspection frequency according to risk.

5 5 Overall Linking Conclusion risk to inspection activity Small firms (1-5) Partners All of the available evidence (internal and external) confirms that this type of firm is at the highest risk of being unable to establish and maintain adequate AML/CTF policies and procedures. They are therefore at a higher risk of exposure to money laundering. Work by the Scottish Government indicates that money laundering by domestic criminals may involve smaller businesses that may be clients of this type of law firm. The LSS will initially address these firms by: a) Continuing to carry out AML/CTF inspections at all such firms at a minimum frequency of three yearly b) Requesting more information to enable more comprehensive risk profiling of such firms. Where a higher level of risk is identified a greater frequency (eg: two yearly or annual) may be appropriate Medium Sized Firms While external reports and LSS/SSDT findings provide insights into risk levels at the smallest and the largest of firms, there is little information available on firms which fall between these two categories. Such firms face a mixed potential inherent risk profile as they benefit from the presence of an increasing number of partners, but may not be able justify the set-up of the strongest AML/CTF controls. Despite this they may also be more likely to engage in more complex and higher risk work than smaller firms. Our approach to such firms will be as for small firms until further risk profiling allows further differentiation. Large Firms There is little history of large firms in Scotland not adhering to adequate AML/CTF policies and procedures. Only one solicitor with a large firm has been found guilty of AML related non-compliance and this relates to work done in Despite this, large firms face a high level of inherent AML/CTF risk arising from the likelihood that they will more frequently work on more complex matters possibly including international elements, PEPS etc. The LSS will address these firms by completing its risk assessment exercise for the large firm group and then scheduling prioritised AML/CTF audits. For large firms which engage in low risk work (eg: a claims focused firm) it is possible that no AML inspection or a very limited one will be required.

6 6 Overall Conclusion Linking risk to inspection activity Firm Services All of the available evidence (internal and external) confirms that property transactions and misuse of client accounts are key areas of AML/CTF risk for Scottish solicitors. While there is limited Scottish evidence regarding AML/CTF risks associated with Trust and Company Service work (including related notarial work), external evidence confirms that this is also a key area. Sham litigation and executry work are not currently considered to pose significant AML/CTF risks for Scottish solicitors. The Law Society of Scotland inspection approach will treat the following factors as lowering the level of AML/CTF risk associated with a firm: Firms with no client account Firms which do not carry out property transactions Firms which do not provide Trust and Company Services Where all three factors are present (eg: as at a criminal law/road traffic law specialist) it is likely that no inspection will be required other than a low volume of checks to act as deterrent to providing inaccurate information to the Society. The scope of inspection programmes will be revised to ensure consistent coverage of the key areas of AML/CTF risk.

7 7 Key AML/CTF threat/vulnerabilities/mitigating factors affecting Scottish solicitors Key threats & vulnerabilities - Practitioners: The Law Society of Scotland agrees with the NRA conclusion that the vast majority of practitioners are not involved in money laundering and are compliant/try to be compliant with POCA and the ML regulations It is agreed that any negligent or unwitting legal professionals pose a risk. It is agreed that small firms/sole practitioners are inherently risky due to factors such as the lack of separate oversight within such firms and resource limitations. Issues arise with a minority of small firms generally and not just sole practitioners. Supporting Evidence Solicitors participating in the NRA 2017 questionnaire exhibited a high level of confidence in the adequacy of their procedures and the likelihood that suspicious activity would be identified/reported Most firms self-certify via their six monthly accounts certificates that they have adequate AML/CTF controls in place Our recent risk assessment exercise focused on our largest firms has demonstrated a strong willingness to engage with the Supervisor and a commitment to a strong AML/CTF control environment Firms whose AML compliance is reported to the CPSC are small firms The very small minority of solicitors with findings at SSDT tend to be smaller firms with around half being sole practitioners and slightly less being two partner firms. Occasional cases also concern solicitors in firms with up to five partners. Only one solicitor with a large firm has been found guilty of an AML related offence at the SSDT. The Law Society of Scotland receives very valuable intelligence from law enforcement. However the volume of intelligence received on AML/CTF does not indicate that law enforcement have concerns regarding a significant number of Scottish solicitors. (Only one Scottish solicitor to date has been convicted of a relevant offence relating to offences in 2003 & 2004).

8 8 Law Society of Scotland experience compared to the conclusions of the HM Treasury/Home Office - UK national risk assessment of money laundering and terrorist financing (2015) Key threats & vulnerabilities Practitioners Larger firms: There have been very few relevant inspection findings to date which concerned large firm AML/CTF compliance and only one large firm solicitor has been found guilty of relevant offences at the SSDT. Larger firms benefit from greater levels of internal oversight than are possible in the smallest firms and may have the capability to develop sophisticated control environments. The above demonstrates the success of larger firms in addressing AML/CTF risks to date. However these firms face a high level of inherent risk due to the higher probability that they will be offering more complex services possibly including work linked to higher risk jurisdictions and higher risk individuals such as PEPs. The risk faced by lawyers arising from high-end money laundering is set out in the UK Government publications summarised page 13. The NRA has commented on AML non-compliance within larger UK law firms featuring in investigations by the Serious Fraud Office

9 9 Law Society of Scotland experience compared to the conclusions of the HM Treasury/Home Office - UK national risk assessment of money laundering and terrorist financing (2015) Key threats & vulnerabilities - Compliance: The Law Society Of Scotland agrees with the NRA that the quality of compliance can be mixed particularly at some smaller firms. In some cases this is evident in the standards of policies and procedures, risk assessment and other due diligence undertaken. The Law Society of Scotland agrees that some SAR under-reporting is likely to occur. The Law Society of Scotland submits SARs per year and in most of these cases we believe that the solicitors had not submitted SARs. As noted elsewhere the Client Protection Sub-Committee regularly review findings relating to inadequate AML/CTF compliance by a minority of small practitioners and where necessary these are reported to the SSDT Firms which operate with poor AML/CTF policies and procedures increase their risk of being targeted by money launderers Key threats & vulnerabilities - Services: The NRA and the work of FATF/CCBE confirm that property transactions are a key risk for Scottish solicitors. Most SSDT convictions which include AML findings have been related to property transactions involving individuals or small companies Most Scottish legal firms can provide services related to trust/company services which may include the use of complex corporate structures/offshore vehicles. While it is likely that the most complex work of this nature is undertaken by large firms, smaller firms do undertake such work which occasionally features in Society inspection and SSDT findings. It is agreed that client accounts are attractive to money launderers as a opportunity to cleanse funds/convert assets While noting risks identified around sham litigation, the LSS has seen no potential examples of this and has received no relevant intelligence. This is seen as likely to be a relatively low risk to the Scottish solicitor profession and therefore a lower priority of Law Society of Scotland AML supervision

10 10 Law Society of Scotland experience compared to the conclusions of the HM Treasury/Home Office - UK national risk assessment of money laundering and terrorist financing (2015) Key threats & vulnerabilities Risk Mitigation by the Society: Inspections - The NRA notes that inspections can be an effective tool in mitigating AML/CTF risk. The Law Society of Scotland operates an significant programme of inspections which covers approximately 25% of firms each year. A new audit approach focused on the risks faced by larger firms will be rolled out during 2017 following completion of a current risk assessment stage Accounts Certificates - All firms holding client money are required to confirm twice per year that they have complied with key aspects of AML/CTF requirements. Education & Training The Society has recently updated and enhanced its AML/CTF website content. Annual AML/CTF roadshows take place at locations throughout Scotland. Guidance The Society has adopted the AML guidance issued by the Law Society of England & Wales which has been approved by HM Treasury. Members have been made aware of the availability of guidance and a link is available on our website. Entry Requirements Controls are in place to prevent inappropriate people becoming or continuing as a solicitor. All solicitor firms are required to be 100% owned by solicitors. The licensed provider regime will allow up to 49% non-solicitor ownership but a formal fit and proper regime will be in place. Skills - Skills available to the Financial Compliance team have recently been enhanced through the recruitment of a AML/CTF professional from financial services. This augments existing solicitor, SOLAS and chartered accountancy/internal audit skills already in place. Relationships with Law Enforcement Strong relationships have been built up with Scottish law enforcement. This will shortly be augmented through the completion of a formal information sharing agreement with Police Scotland.

11 11 Scottish Government Scotland s Serious Organised Crime Strategy (June 2015) What does Serious Organised Crime look like in Scotland? 232 Serious Organised Crime Groups (SOCG) operating in Scotland 3700 individuals involved 70% of SOCGs are located in the West of Scotland, 18% in the East and 12% in the North 65% of SOCGs involved in drug crime 65% of SOCGs are involved in seemingly legitimate businesses (eg: licenced premises, taxis, restaurants, shops, garage repairs, vehicle maintenance and property development Over 650 such businesses identified Case Studies: Operation Frizz - money laundering on an industrial scale involving fraudulent VAT repayment claims and complex international complex structures. In this case a Scottish solicitor was jailed and faces confiscation procedures Operation Trust- Resulted in the seizure of many millions of pounds of controlled drugs and confiscation of 600,000 Major financial institutions noted to have robust structures in place for monitoring and reporting suspicious activity, but notes that money laundering can impact on the smallest financial institutions Conclusions: The role of regulatory bodies in combating SOCGs is noted throughout the Strategy Operation Frizz demonstrates the serious money laundering risks faced by solicitors outwith property transaction work The scale of SOCG activity means that there is significant risk that Scottish solicitors will encounter SOCGs in their professional lives The nature of businesses highlighted in the strategy suggests that the highest risk may be faced by smaller legal practices

12 12 HM Treasury/Home Office - UK national risk assessment of money laundering and terrorist financing (2015) Overall Conclusion Legal Sector rated High Risk due to the skills, services, products offered by the legal sector Key threats & vulnerabilities - Practitioners: Vast majority not involved in money laundering and are compliant/try to be compliant with POCA and the ML regulations Negligent or unwitting legal professionals Challenges in supervision small firms/sole proprietors Key threats & vulnerabilities - Compliance: Generally mixed compliance levels Due diligence, source of funds/wealth, beneficial ownership, polices & procedures, reliance Poor compliance noted in serious law enforcement investigations PEP compliance, enhanced due diligence, CDD, policies & procedures, SAR submission including larger firms operating in specialist areas Generally mixed compliance levels Due diligence, source of funds/wealth, beneficial ownership, polices & procedures, reliance Likely SAR underreporting Key threats & vulnerabilities - Services: Property transactions utilising criminal proceeds - Most valuable asset type for UK criminals - Serious international cases PEP property acquisitions - SRA report 25% of firms have experienced attempted property fraud/property related money laundering Use of legal professionals to create complex corporate structures/offshore vehicles to conceal ownership/movement of criminal assets Abuse of client accounts banking, erroneous payments in, - potentially greater risk for sole practitioners - independent inspections mitigate risk

13 13 A) National Crime Agency High End Money Laundering Strategy (Dec. 14)/ B) National Strategy Assessment of Serious and Organised Crime 2015 (June 2015) A) This report noted the need to focus increasingly on high end money laundering (as opposed to the laundering of street cash) involving specialist services such as tax planning and noted: Professionals such as lawyers, trust and company formation agents, investment bankers and accountants are among those at greatest risk of becoming involved, either wittingly or unwittingly. B) The use of professional enablers increases the complexity of money laundering activities, for example with the setting up of shell companies, trusts and other instruments providing anonymity. We believe the professions posing the greatest risk are within the financial and legal sectors, for example accountants and solicitors

14 14 Financial Action Task Force (FATF) Money Laundering Vulnerabilities of Legal Professional 2013 / CCBE A Lawyers Guide to Detecting and Preventing Money Laundering FATF - Key money laundering typologies: Misuse of Client Account - conversion, accessing the financial system, hiding ownership, as part of other fraudulent activities Property Purchases a key area of potential ML/TF vulnerability for legal professionals Creation of Companies and Trusts Management of Companies and Trusts - adding credibility through ongoing involvement in management of companies and trusts Managing Client Affairs and making introductions Litigation - risk of sham litigation noted Specialised Legal Skills - Applying in all key activities property, company services etc - Lower risk but still possible that relevant activity will be encountered through work in other areas such as probate etc CCBE - Key money laundering typologies: Use of client accounts Purchase of real estate - Lawyers involved in real estate transactions should be particularly vigilant - Property represents 30% of all criminal assets Creation of trusts, companies, charities Management of trusts, companies, charities Sham litigation

15 15 laundering and terrorist financing affecting our members (May 2017 Summary of Scottish practitioner responses to the ongoing National Risk Assessment update exercise Overall Conclusion 36 (31 small to medium firms and 5 large firms) Scottish practitioners completed the Home Office/HM Treasury practitioner questionnaire issued as part of the ongoing exercise to update the NRA. This is a significant response indicating a good level of engagement with the subject. The responses generally provide a positive picture of solicitor understanding of the ML/TF risks they face and their ability to manage these risks. Summarised responses to key questions are noted below. Can services offered by solicitors be used to mask sources/ownership/destination/purpose of funds? All respondents acknowledged that this was possible but nearly all respondents thought it was unlikely to occur due to the control environments established by firms and the nature of services provided. What is the level of complexity and exposure to high risk jurisdictions in the services provided? Nearly all small to medium firms reported very low levels of complexity and exposure to high risk jurisdictions. Large firms pointed out the broad range of services provided and the absence of any typical client. While some complexity and exposure to high risk jurisdictions was reported it was clear that in most cases, the firms activities fell into lower risk categories.

16 16 laundering and terrorist financing affecting our members (May 2017 Summary of Scottish practitioner responses to the ongoing National Risk Assessment update exercise (Continued) Would suspicious activity be reported to the National Crime Agency? All respondents were very confident that suspicious activity would be reported. Some respondents commented that the need to submit a report only arose occasionally. Do firms have the capacity and capability to mitigate their ML and TF risks? Firms reported that their risk mitigation capacity and capability was in the range from adequate to very good. Six small firms while confirming the above commented on the resource pressure arising from compliance work.

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