Money laundering (ML) can be defined as the attempt to give funds derived from criminal activities the appearance of legitimacy.
Terrorist financing (TF) is the process by which individual terrorists or terrorist organisations obtain funds to commit acts of terrorism.
The legal profession is one of the non-financing sectors identified by the international anti-money laundering community as potentially highly vulnerable to MLTF. In dealing with international money laundering and the risks associated with legal practitioners, the report specifically mentions services provided by the legal industry. These include:
The use of legal entities to recover fictitious debt has also been identified as a method to possibly move funds from one entity or person to another to give criminal proceeds the appearance of legitimacy.
It is important to note that all legal practitioners have a reporting responsibility under the FIC Act.
During the five years from April 2016 to March 2021, legal practitioners filed a total of 11 966 cash threshold reports at an average of 2 393 per year. During the same period, the sector filed a total 1 160 suspicious and unusual transaction reports at an average of 232 per year. This volume of reporting can be regarded as very low considering that as of 31 March 2021 there were 16 059 legal practitioners, including branches, registered with the FIC.
This limited number of reports could possibly be the result of a limited understanding of the risks in the sector.
As most reports filed in the legal sector relate to cash threshold, it can be assumed that cash is still being used and appears prevalent in the legal practitioner sector. This makes attorneys even more vulnerable to money laundering abuse.
It is important that legal practitioners consider the following risk factors when conducting their daily business. The products and services legal practitioners provide that are internationally recognised as more likely to be abused by criminals in the money laundering process include:
Legal practitioners are required to assess their client risk profiles in accordance with their Risk Management and Compliance Programme. When dealing with their clients, legal practitioners should be aware of the following scenarios or behavior that could point to MLTF.
Criminals will potentially use legal practitioners to act on their behalf, thereby giving an impression of legitimacy to transactions involving the proceeds of crime. It is therefore important to monitor the nature and purpose of client engagements. Examples of transactions that are potentially high risk for money laundering include:
In South Africa, cash is still used extensively, and this can be seen from the number of cash threshold reports filed in the legal environment. Legal practitioners must also be aware of instances where cash is paid into their business accounts and into the accounts of their clients.
Risks relating to delivery channels
Legal practitioners must be aware of the delivery channels they use to attract and deal with clients. Not onboarding clients in a face-to-face manner may increase the risk of the legal practitioner being abused by criminals to launder the proceeds of crime.
Where an intermediary is used to onboard clients, a legal practitioner must do proper due diligence on the intermediary and its business and must be familiar with the risk mitigation process and procedures the intermediary might have in place.
Various forms of technology are used to advertise services and to conduct business. Legal practitioners who advertise their services on social media platforms, or who are considering conducting business with clients via social media platforms, must be aware of the higher potential risks associated with the less stringent verification requirements of social media.
Where social media platforms are used to share information on products or services or to onboard clients, a legal practitioner must ensure that these clients are properly identified and verified and that all the relevant information pertaining to the risks posed by these clients is obtained.
Third-party service providers that introduce clients to the practice must be properly identified and verified to ensure they are above board. The payment of funds through a third party could be done to disguise the source of funds or certain assets. The legal practitioner must always ensure that he or she fully understands the source of funds and the reason for constructing the transaction in this way.
A typical example of risk associated with delivery channels is where a legal practitioner is introduced to a client through an estate agent. In this instance, the risk associated with the use of an intermediary can be mitigated by the verification of the agent’s fidelity fund certificate. (This is already a requirement of the Property Practitioners Act and is therefore not a good example of risk mitigation.)
Some foreign jurisdictions pose a higher risk for money laundering, and clients from these jurisdictions may therefore also pose a risk. The fact that transactions can take place electronically across national jurisdictions increases the risk associated with this type of foreign jurisdiction.
Geographic location and services provided will also be a risk factor. International and domestic experience indicates that criminals are attracted to high-value immovable property located in exclusive or seaboard areas of South Africa. Legal practitioners should be especially vigilant in these areas.
Potential high risk is posed by clients from countries with the following characteristics:
Terrorist financing risk
Legal practitioners providing services to NPOs and NGOs should ensure that the funds are used in accordance with the stated objectives of these organisations. Legal practitioners must further be aware of the screening process to ensure that clients are not on the United Nations sanctions list.
Indicators of money laundering and terrorist financing activity for the legal sector
The following could be regarded as MLTF vulnerabilities and risks associated with legal practitioners:
In conclusion, the report found that the number of regulatory reports received from legal practitioners is very low. This is concerning as it points to a possible lack of compliance awareness among legal practitioner firms and their staff. Overall, the report found that the inherent risk of money laundering for the legal practitioner sector in South Africa is classified as high and the inherent terrorist financing risk is regarded as low.
Written by Wessel de Kock