AML red flags in law and conveyancing: the warning signs of money laundering a solicitor or conveyancer is expected to notice

Why law and conveyancing

Laundering has three stages: placement, where cash enters the system; layering, where it moves through accounts, companies and trusts to break the trail; and integration, where it comes back as a clean asset. Legal and conveyancing services sit in the last two. A trust account can receive and pass on funds; a company or trust can hide who owns an asset; a settled property is the cleanest asset there is. That is why the profession was brought into the regime and why the red flags below concentrate on funds, structures and property.

In the client

• Resists ordinary identification, offers documents that look wrong or inconsistent, or wants to skip verification because they are in a hurry or well known.
• Will not say, or keeps changing, who the beneficial owners or controllers of a company or trust are.
• Is a politically exposed person, or closely connected to one, and the matter is large or unusual for them.
• Shows no interest in the terms, the price or the outcome of a transaction they are funding.
• Uses an intermediary or introducer and never appears in person, without a reason that fits.

In the funds

• Source of funds inconsistent with the client's known income, business or profile, or an explanation that changes when questioned.
• Funds arriving from a third party nobody mentioned, from several accounts, or from a country unconnected to the client or the matter.
• Cash offered for a deposit or settlement, or payments kept just under AU$10,000 (structuring).
• Requests to receive money into trust and pay it out to another person or account with no legal service attached.
• Overpayments followed by a request to refund the difference to a different account.

In the structure

• Companies, trusts or partnerships with no commercial purpose, or layered across several jurisdictions for a simple domestic transaction.
• Nominee directors or shareholders where the real controller stays out of sight.
• Frequent changes of control, directors or registered office with no business reason.
• A request to set up an entity urgently, before any business plan exists.

In the instructions

• Instructions coming from someone other than the client, or a third party directing how funds move.
• Pressure to settle or complete unusually fast, or to bypass steps in your normal process.
• Reluctance to put instructions in writing, or instructions that change the destination of funds late.
• A request to backdate documents or to describe a transaction in a way that does not match the facts.

In the transaction

• A property bought and resold quickly at a very different price, or sold between related parties at a price out of line with the market.
• A purchase price well above or below the client's means, or a deposit far larger than usual.
• A business sale where the price, the buyer and the funding do not fit together.
• Settlement funds routed through several accounts, or arriving from overseas in tranches.

Red flag or oddity

Most oddities have ordinary explanations: a parent funding a deposit, an executor selling an estate property fast, a migrant bringing savings from overseas. The test is not whether something is unusual but whether the explanation fits the facts you can see. Ask the question, record the answer, and compare it with the file. One unexplained flag can be enough for a suspicion on reasonable grounds; two or three together usually are. You do not need proof and you should not investigate; you need to decide, with your compliance officer, whether the matter may involve money laundering, proceeds of crime, tax evasion or a client who is not who they say.

What to do when one appears

1. Write it down the day you notice it: the fact, the explanation given, who noticed. This is the start of the clock if a suspicion forms.
2. Escalate to the compliance officer. Staff do not decide; the officer does.
3. Separate the privileged from the non-privileged facts. Identity, the retainer, the transaction and money movements are not privileged.
4. If a suspicion on reasonable grounds exists, lodge the SMR within 3 business days (24 hours for terrorism financing; 5 business days with a privilege claim and AUSTRAC's privilege form).
5. Rate the client high, apply enhanced due diligence (source of funds and wealth, partner approval) and decide under your program whether to continue acting.
6. Say nothing to the client or anyone outside the firm that could prejudice an investigation. Record the reasoning on the file for seven years.

Refusing to act

Nothing in the Act forces you to continue a matter that worries you, and nothing forces you to stop after a report. The decision is yours under your program and your professional obligations. What the Act does require is that you do not provide the designated service to a client whose initial due diligence is incomplete, and that a report, where due, is lodged whether or not you keep acting.