Money laundering and anti-money laundering regulations - Cir...

Learning Outcomes

This article outlines when and how to report suspected money laundering within the UK AML regime, including:

• Legal obligations to report suspicions under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017
• Common warning signs and risk factors indicating potential money laundering
• The reporting process and recipients, including internal reports to the MLRO and external SARs to the NCA, and applicable timing
• Principal criminal offences under POCA (ss 327–329, 330–331, 333A and 342)
• The “knowledge or suspicion” and “reasonable grounds” thresholds in the regulated sector
• The risk‑based due diligence regime, including simplified and enhanced measures, PEPs and high‑risk third countries
• The scope and limits of legal professional privilege
• The DAML consent process and statutory timelines
• Interaction with the Criminal Finances Act 2017 corporate offence and the UK financial sanctions regime
• Application to practical SQE1‑style scenarios

It frames these elements in a structured, exam-focused way, explaining how the statutory framework, red‑flag indicators and reporting procedures interact in practice, how to distinguish between mere background risk and a reportable suspicion, how to approach multiple‑choice questions that test overlapping POCA duties and AML regulatory obligations, and how to apply the reporting thresholds, available defences and tipping‑off rules accurately to realistic SQE1 problem questions and professional‑conduct fact patterns.

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, with a focus on the following syllabus points:

• 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)
• the reporting threshold (“knowledge or suspicion” and “reasonable grounds”) and the low bar for suspicion
• risk-based due diligence (standard, simplified and enhanced), including PEPs and high‑risk third countries
• firm‑wide risk assessment, policies, controls, training and record keeping under the Regulations
• the DAML consent process and applicable timelines
• the Criminal Finances Act 2017 corporate offence (failure to prevent facilitation of tax evasion)
• the UK financial sanctions regime and obligations to screen, freeze and report

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. Law firms in the regulated sector must adopt a risk‑based approach, maintain appropriate policies and controls, appoint a nominated officer (MLRO) and a money laundering compliance officer (MLCO), conduct customer due diligence (CDD), train staff, and keep records. Failure to report where required, or tipping off, are criminal offences and also serious breaches of professional conduct.

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:

• Placement: introducing criminal funds into the financial system (e.g., depositing cash, buying high‑value assets).
• Layering: moving funds through complex transactions to obscure their origin (e.g., multiple bank transfers, offshore structures, sham contracts).
• Reintroduction: reintroducing the laundered money into the legitimate economy (e.g., investing in property or businesses, loans from apparently legitimate entities).

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

Legal services are attractive to launderers at each stage. Particular risk areas include property purchases, company and trust work, and misuse of client accounts. Real estate can rapidly integrate value; client accounts can be abused to add a veneer of legitimacy; and complex ownership layers can be deployed to frustrate tracing. Sham litigation can also be used to justify artificial transfers through a fabricated “dispute” and settlement.

The Legal Framework

Solicitors must comply with two main sets of rules:

• Proceeds of Crime Act 2002 (POCA): creates offences relating to money laundering (ss 327–329), imposes reporting duties in the regulated sector (s 330 for employees; s 331 for nominated officers), prohibits tipping off (s 333A), and criminalises prejudicing an investigation (s 342).
• Money Laundering Regulations 2017: set out the risk-based compliance framework (firm‑wide risk assessment, policies and controls, internal reporting and appointments, training, CDD and ongoing monitoring, record keeping).

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.

The Regulations require firms to maintain a written firm‑wide risk assessment (reg 18), implement policies, controls and procedures (reg 19), appoint a MLCO and a nominated officer/MLRO (reg 21), train staff (reg 24), conduct appropriate CDD (regs 27–28, 33, 37), and keep records (reg 40). The UK financial sanctions regime imposes additional obligations to screen clients and counterparties, freeze assets of designated persons, and report to the Office of Financial Sanctions Implementation (OFSI). Separately, the Criminal Finances Act 2017 introduced the corporate offence of failure to prevent the criminal facilitation of tax evasion, requiring reasonable prevention procedures.

Duty to Report Suspicion

Solicitors and relevant employees must report to their firm's nominated officer (MLRO) as soon as they know or suspect, or have reasonable grounds to know or suspect, that a person is engaged in money laundering, where the information came to them in the course of business in the regulated sector (POCA s 330).

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 threshold for “suspicion” is low. Case law indicates that suspicion requires a possibility, more than fanciful, that the relevant facts exist; it is a subjective test, but one that can be triggered by relatively limited information. In the regulated sector, a failure to disclose can be committed if there were reasonable grounds for knowing or suspecting, even if the individual did not in fact suspect, provided the information came in the course of business. The report must be made as soon as practicable and before doing any act that could amount to a prohibited act under ss 327–329 (such as transferring suspected criminal property).

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.

The nominated officer must consider internal disclosures and, where appropriate, submit a SAR to the NCA. Where the firm seeks a Defence Against Money Laundering (DAML) consent to proceed with a transaction that might otherwise constitute a prohibited act, the nominated officer should request this within the SAR.

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, avoid personal contact, provide false or forged identification, or refuse to provide due diligence information.
• Unusual or complex transactions with no clear legal or commercial purpose, including unexplained use of multiple accounts or intermediaries.
• Transactions involving high‑risk third countries (with weak AML controls), or counterparties located in secrecy jurisdictions.
• Requests to use the firm's client account for holding or transferring funds unrelated to specific legal work (“banking”).
• Large cash payments, unexplained third‑party funding, payments from unrelated or offshore entities, or sudden changes in payment instructions.
• Property transactions at a significant undervalue or super‑normal haste to complete without a clear reason.
• Frequent changes in ownership structures, complex company/trust arrangements, or reliance on nominees that obscure beneficial ownership.
• Politically exposed persons (PEPs), their family members or close associates, without a credible source of wealth.
• Use of new or high‑risk instruments (e.g., cryptoassets) to settle legal fees or fund transactions, or back‑to‑back/circular payments with no economic rationale.
• Remote instructions only, combined with urgency and resistance to standard CDD (“just do it quickly”).

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 and whether a DAML is needed before any transfer. You must not return the funds or proceed with the transfer until appropriate consent has been obtained or the DAML timelines have expired. Do not alert the client to any SAR.

The Reporting Procedure

Internal Disclosure

As soon as you suspect money laundering, you must make an internal report to the nominated officer (MLRO). This should be done promptly, in writing where possible, and include sufficient detail to enable a reasoned decision (who/what/when/where/how much/why suspicious) together with any supporting documents. Pending the MLRO’s decision, do not take any step that might amount to a prohibited act or prejudice an investigation. If the MLRO is unavailable, follow your firm’s escalation policy to a designated deputy.

External Disclosure (SAR)

If the MLRO decides that the suspicion is justified, they must submit a SAR to the NCA as soon as possible via the secure online portal. The SAR should include the identities of relevant parties, account or property details, a concise description of the activity, reasons for suspicion, and whether consent is sought to proceed. The MLRO should keep records of the internal report, decision making and any SAR submitted.

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 DAML) or the statutory timeframes expire. On receipt of a DAML request, the NCA has an initial period of seven working days to respond. If consent is refused, a moratorium period of 31 calendar days applies, during which the firm must not proceed; the moratorium can be extended by court order, in stages, up to a total maximum of 217 days in appropriate cases. In practice, firms should manage client expectations without tipping off, freeze relevant activity, and consider whether to exit the instruction if consent is refused.

Key Term: Defence Against Money Laundering (DAML)
A statutory consent granted by the NCA that provides a defence to a money laundering offence for specified acts, where the NCA has approved proceeding or the relevant statutory periods have expired.

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 that disclosure is likely to prejudice the investigation. The prohibition does not prevent discussions that would not prejudice an investigation (e.g., generic requests for CDD or commercially neutral updates on delay) and does not cover making a disclosure for the purpose of dissuading a client from engaging in criminal conduct. Discussing a person’s public designation under the UK sanctions list does not amount to tipping off because sanctions listings are public.

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. You may give a neutral explanation (e.g., “regulatory checks are ongoing”) and request any outstanding CDD information without indicating that a SAR has been made.

Worked Example 1.3

Your MLRO has submitted a DAML request. The client asks for the return of funds while the firm “pauses the purchase.” The seven‑day notice period has not yet expired. What should you do?

Answer:
Do not return funds or take any step that would involve dealing with suspected criminal property until the NCA has granted consent or the statutory periods have expired. Explain neutrally that regulatory checks prevent immediate movement of funds and avoid any statement that could prejudice an investigation.

Defences and Exceptions

There are limited defences to the reporting obligations and to the primary money laundering offences:

• Authorised Disclosure (DAML): Making a SAR and obtaining consent from the NCA before proceeding provides a complete defence for the specified act (POCA s 335). The defence also applies if the initial seven working days elapse without refusal or the moratorium expires without extension.
• Reasonable Excuse: There may be a defence to failure to disclose where there is a reasonable excuse for not making a report (e.g., a genuine and reasonable belief that the conduct was not money laundering, or an immediate risk to life if a report were made). It is fact‑sensitive and narrowly construed.
• Legal Professional Privilege (LPP): Information received in privileged circumstances is exempt from disclosure, unless the communication is made with the intention of furthering a criminal purpose. Legal advice privilege and litigation privilege may both apply; privilege belongs to the client and must be respected unless waived or the “crime/fraud” exception applies. Privileged material must not be included in a SAR.
• Adequate Consideration (s 329): For the acquisition, use or possession offence, it is a defence that a person acquired property for adequate consideration (e.g., for value in arm’s length exchange). This does not apply if the person knew or suspected that the consideration would help another to carry out criminal conduct.
• Training Defence (regulated sector failure to disclose): A person in the regulated sector is not guilty of failure to disclose if they did not know or suspect and had not been provided with relevant training by their employer (s 330(7)).
• Overseas Conduct: For certain reporting obligations, if the relevant conduct occurred abroad and was lawful there, and would not be punishable in the UK by 12 months’ imprisonment or more, a defence may apply.

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.

Beyond reporting, the AML regime includes due diligence exceptions (e.g., simplified due diligence) and escalations (enhanced due diligence). Although not itself a “defence” to POCA offences, appropriate due diligence and documentation are critical to demonstrating compliance and may be relevant to professional and regulatory scrutiny.

Customer Due Diligence (CDD) and Ongoing Monitoring

Key Term: customer due diligence (CDD)
Measures to identify and verify the identity of the client and beneficial owners, understand the nature and purpose of the retainer, and conduct ongoing monitoring to ensure transactions are consistent with the firm’s knowledge of the client.

Under reg 27, CDD is required when establishing a business relationship, carrying out an occasional transaction, when money laundering or terrorist financing is suspected, or where there are doubts about the veracity of previously obtained data. Standard CDD involves verifying the client’s identity from reliable, independent sources and identifying/verify any beneficial owner.

Key Term: beneficial owner
The individual(s) who ultimately own or control a client (e.g., more than 25% ownership or control of a company) or on whose behalf a transaction is conducted.

Simplified due diligence (reg 37) may be applied where the relationship presents a lower risk (e.g., certain regulated institutions, listed companies), but only after documenting a risk‑based assessment and obtaining sufficient evidence to justify the approach. Enhanced due diligence (reg 33) is required in higher‑risk situations, such as where the client or counterparty is in a high‑risk third country, the client is a PEP (or family member/close associate), false or stolen ID has been provided, or the transaction is unusually large or complex or has no apparent lawful purpose.

Key Term: politically exposed person (PEP)
An individual entrusted with prominent public functions (other than a mid‑ or junior‑ranking official), including their immediate family members and known close associates, who present a higher risk of bribery or corruption.

Enhanced measures include obtaining senior management approval, establishing source of funds and source of wealth with independent evidence, deepening understanding of the ownership/control structure, and enhanced ongoing monitoring. As part of ongoing monitoring (reg 28(11)), firms should scrutinise transactions to ensure consistency with knowledge of the client and update CDD where necessary.

Consequences of Failing to Report

Failure to report a suspicion of money laundering is a criminal offence under POCA for those in the regulated sector (s 330) and for nominated officers who fail to make an external disclosure where required (s 331). Tipping off (s 333A) and prejudicing an investigation (s 342) are also criminal offences. The primary money laundering offences (ss 327–329) carry severe penalties. Broadly:

• ss 327–329 (concealing, arranging, acquiring/using/possessing): up to 14 years’ imprisonment and/or an unlimited fine.
• s 330/s 331 failure to disclose: up to five years’ imprisonment and/or a fine.
• s 333A tipping off: up to two years’ imprisonment and/or a fine.
• s 342 prejudicing an investigation: up to five years’ imprisonment and/or a fine.

Regulatory consequences can include enforcement action by the SRA for breaches of the Standards and Regulations and the Money Laundering Regulations, with significant fines, practising conditions, suspension, or referral to the Solicitors Disciplinary Tribunal. Failures are also likely to breach SRA Principles (including Principles 1, 2, 4, 5 and 7) and may trigger civil liability or reputational damage. Separate penalties can arise for breaches of UK financial sanctions.

Worked Example 1.4

A long‑standing client asks for urgent advice on settling a past undeclared tax liability. The client provides full information and asks for advice on making a voluntary disclosure. Do you need to make a SAR?

Answer:
Legal advice privilege protects confidential communications for the purpose of obtaining legal advice on past conduct. Merely advising on past tax irregularities does not of itself require a SAR. However, if the client seeks assistance to continue or further criminal conduct (e.g., to hide assets), privilege will not apply and a SAR may be required. Apply CDD and consider whether a SAR is necessary based on the facts; avoid tipping off.

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 through placement, layering and reintroduction.
• Solicitors must report suspicions to their firm’s nominated officer (MLRO) as soon as possible and before taking steps that could constitute a prohibited act.
• The nominated officer decides whether to submit a SAR to the NCA and, where relevant, seek a DAML before proceeding.
• The suspicion threshold is low; in the regulated sector, “reasonable grounds” to suspect can trigger the duty even without actual suspicion.
• Do not proceed with a suspicious transaction until NCA consent is obtained or statutory time periods expire.
• Tipping off a client or third party about a report or investigation is a criminal offence unless a narrow exception applies.
• Legal professional privilege may exempt some information from disclosure, but not communications in furtherance of crime.
• Firms must maintain a risk‑based AML framework: firm‑wide risk assessment, policies and controls, appointments, staff training, CDD and record keeping.
• Enhanced due diligence is required for higher‑risk scenarios, including PEPs and high‑risk third countries; simplified measures require documented low risk.
• Failure to report or other POCA offences carry significant criminal penalties and can result in disciplinary action by the SRA; separate sanctions and tax‑evasion‑prevention obligations also apply.

Key Terms and Concepts

• money laundering
• criminal property
• Suspicious Activity Report (SAR)
• nominated officer (MLRO)
• tipping off
• legal professional privilege (LPP)
• Defence Against Money Laundering (DAML)
• customer due diligence (CDD)
• beneficial owner
• politically exposed person (PEP)