The Solicitors Regulation Authority has published new guidance warning solicitors about the dangers of sham litigation.
According to the SRA, litigation firms are subject to significant risk due to being involved with high-value transactions. The ownership of assets can also be easily obscured in this area, which drastically increases the risk of money laundering.
Criminals are known to instruct lawyers to pursue a claim in the courts so the subsequent judgment or settlement agreement can serve as a front for the transfer of illicit funds.
The SRA cited the case of client Narinder Kaur, who reportedly used several firms in purported litigation with her sibling. In actuality, this litigation was being used to mask funds across several client accounts.
On their website, the SRA expounded that the legal sector’s vulnerability to sham litigation for money laundering meant that “firms must remain vigilant.”
“Litigation is not an activity within scope of the MLR 2017 which makes it attractive to money launderers. This exclusion means that the requirements of the MLR 2017, for example verification of identity, do not apply to purely litigation work.”
“Law firms, however, are still within scope of the Proceeds of Crime Act and should be capable of identifying red flags, as well as investigating the circumstances further to prevent their services from being misused in sham litigation.”
The SRA have concluded that firms will need to be cautious when considering the following:
- Clients who demonstrate thorough knowledge of law firm processes
- Unusual client information and identity verification
- Instructions from clients far from their home address
- Unsolicited contact, particularly from individuals who the claim is against
- Payment preferences and settlement urgency
- Unreliable appointment attendance.
The regulator expects firms to keep detailed records to ascertain their clients are who they claim to be. Anyone with suspicions about money laundering should submit a report to the National Crime Agency.
In a recent article, the Law Gazette article commented that, “Firms can strengthen their defences through early involvement of compliance officers, regular refreshment of accounts rules and making sure policies and procedures are up to date. E-verification systems should not be solely relied upon to check up on clients.”
Though most of the firms involved had strong suspicions around Kaur from the outset, others had gotten to the point of receiving payments. Kaur (also known as Nina Taria) sued her brother and then approached firms for a supposed judgment debt claim against him.
A man (someone posing as her brother) then contacted the affected firms and offered partial payment from a credit card that has since been discovered to have been stolen. Kaur has been convicted on several counts of fraud and jailed for 10 years.
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All firms must uphold high standards in their AML systems and processes, as well as in their management and supervision. At the Regulation & Compliance Office, we can offer a number of outsourced support solutions, including:
Regulation & Compliance Service – Our Risk Management Assessment Service has been specifically designed to review and update a firm’s approach to risk and compliance management.
MLR 2017 Regulation 21 Independent Audit – A review of the firm’s approach to regulation and compliance, including AML procedures with the audit meeting the requirements of Regulation 21 of AML 2017. The output provides the firm with a written gap analysis and solutions to remedy any issues and ensure compliance.
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