Money laundering and anti-money laundering regulations - Circumstances where suspicion of money laundering should be reported

Learning Outcomes

After studying this article, you will be able to identify the legal obligations to report suspicions of money laundering under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017. You will recognise common warning signs, understand the reporting process, and know to whom and when a report must be made. You will also be able to apply these principles to practical SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the circumstances in which suspicion of money laundering should be reported, the relevant legal duties, and the reporting process. As you revise, focus on:

• the definition and stages of money laundering
• the legal framework: Proceeds of Crime Act 2002 (POCA) and Money Laundering Regulations 2017
• the duty to report suspicions of money laundering
• typical warning signs and risk factors
• the procedure for making internal and external disclosures (SARs)
• the role of the nominated officer (MLRO) and the National Crime Agency (NCA)
• the consequences of failing to report or tipping off
• defences and exceptions (e.g., legal professional privilege)

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the three main stages of money laundering, and why is each significant?
2. When must a solicitor report a suspicion of money laundering, and to whom should the initial report be made?
3. What is a Suspicious Activity Report (SAR), and what is its purpose?
4. What is the offence of "tipping off" under POCA, and how can it arise in practice?

Introduction

Money laundering is a serious criminal offence and a major risk area for legal professionals. Solicitors and law firms are subject to strict anti-money laundering (AML) duties under the Proceeds of Crime Act 2002 (POCA) and the Money Laundering Regulations 2017. Understanding when and how to report suspicions of money laundering is essential for SQE1 and for legal practice.

The Nature and Stages of Money Laundering

Money laundering is the process by which criminals disguise the origin of the proceeds of crime, making them appear legitimate.

Key Term: money laundering
The process of concealing, disguising, or converting criminal property to make it appear to come from a legitimate source.

There are three main stages:

1. Placement: Introducing criminal funds into the financial system (e.g., depositing large sums of cash).
2. Layering: Moving funds through complex transactions to obscure their origin (e.g., multiple bank transfers, buying and selling assets).
3. Reintroduction: Reintroducing the laundered money into the legitimate economy (e.g., investing in property or businesses).

Key Term: criminal property
Any property that constitutes or represents a benefit from criminal conduct, directly or indirectly.

The Legal Framework

Solicitors must comply with two main sets of rules:

• Proceeds of Crime Act 2002 (POCA): Creates offences relating to money laundering and imposes duties to report suspicions.
• Money Laundering Regulations 2017: Sets out risk-based compliance requirements, including client due diligence and internal controls.

Key Term: Suspicious Activity Report (SAR)
A formal report made to the National Crime Agency (NCA) when there is knowledge or suspicion of money laundering.

Duty to Report Suspicion

Solicitors and relevant employees must report to their firm's nominated officer (often called the Money Laundering Reporting Officer, or MLRO) as soon as they know or suspect, or have reasonable grounds to know or suspect, that a person is engaged in money laundering.

Key Term: nominated officer (MLRO)
The person within a firm responsible for receiving internal reports of suspected money laundering and, where appropriate, making external reports to the NCA.

The nominated officer must then consider whether to submit a SAR to the NCA.

Key Term: tipping off
The offence of informing a person that a report or investigation into money laundering is being made, where this is likely to prejudice the investigation.

Typical Warning Signs and Risk Factors

Solicitors must be alert to "red flags" that may indicate money laundering. These include:

• Clients who are secretive, evasive, or refuse to provide identification documents.
• Unusual or complex transactions with no clear legal or commercial purpose.
• Transactions involving high-risk jurisdictions (countries with weak AML controls).
• Requests to use the firm's client account for holding or transferring funds unrelated to legal work.
• Large cash payments or unexplained third-party funding.
• Urgent instructions to complete transactions quickly without a clear reason.

Worked Example 1.1

A client you have never met in person asks you to hold £100,000 in your client account for a property purchase. The client then cancels the transaction and requests the funds be sent to an overseas company. What should you do?

Answer: You should report your suspicion to your firm's nominated officer (MLRO) immediately. The MLRO will consider whether to submit a SAR to the NCA. You must not return the funds or proceed with the transaction until you have obtained appropriate consent.

The Reporting Procedure

Internal Disclosure

As soon as you suspect money laundering, you must make an internal report to the nominated officer (MLRO). This must be done as soon as practicable and before taking any further action that might facilitate the offence.

External Disclosure (SAR)

If the MLRO decides that the suspicion is justified, they must submit a SAR to the NCA as soon as possible. The SAR should include all relevant details, such as the identity of the client, the nature of the transaction, and the reasons for suspicion.

Consent and Defence Against Money Laundering (DAML)

If a transaction would otherwise constitute a money laundering offence, the firm must not proceed until the NCA grants consent (a "defence against money laundering" or DAML). If consent is refused, the firm must not proceed for a set period (usually seven working days, with a possible further moratorium of 31 days).

Tipping Off

It is a criminal offence to inform the client or any third party that a SAR has been made or that an investigation is underway, if this is likely to prejudice the investigation.

Worked Example 1.2

You have submitted a SAR to the NCA regarding a suspicious transaction. The client calls to ask why their matter is delayed. Can you tell them about the SAR?

Answer: No. You must not reveal that a SAR has been made or that an investigation is taking place, as this could amount to tipping off, which is a criminal offence.

Defences and Exceptions

There are limited defences to the reporting obligations:

• Authorised Disclosure: Making a SAR and obtaining consent from the NCA before proceeding.
• Reasonable Excuse: In rare cases, a solicitor may have a reasonable excuse for not making a disclosure (e.g., the information is already in the public domain).
• Legal Professional Privilege (LPP): Information received in privileged circumstances (e.g., legal advice) is exempt from disclosure, unless the communication is made with the intention of furthering a criminal purpose.

Key Term: legal professional privilege (LPP)
The right of clients to keep communications with their legal advisers confidential, exempting such information from disclosure requirements, unless used for criminal purposes.

Consequences of Failing to Report

Failure to report a suspicion of money laundering is a criminal offence under POCA. The offence may be committed even if you did not actually know or suspect, but there were reasonable grounds to do so. Disciplinary action by the SRA may also follow.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Money laundering is the process of disguising criminal property as legitimate funds.
• Solicitors must report suspicions of money laundering to their firm's nominated officer (MLRO) as soon as possible.
• The nominated officer decides whether to submit a Suspicious Activity Report (SAR) to the NCA.
• Do not proceed with a suspicious transaction until NCA consent is obtained.
• Tipping off a client or third party about a report or investigation is a criminal offence.
• Legal professional privilege may exempt some information from disclosure, but only in narrow circumstances.
• Failure to report suspicion or reasonable grounds for suspicion is a criminal offence under POCA.

Key Terms and Concepts

• money laundering
• criminal property
• Suspicious Activity Report (SAR)
• nominated officer (MLRO)
• tipping off
• legal professional privilege (LPP)