13.3 Money Laundering: Purpose, Scope and Reporting

Purpose, scope and international context

Money laundering is the process of turning criminal property into something that looks legitimate. The usual three stages — placement (getting the proceeds into the system), layering (moving them through entities, accounts or property to disguise origin), and integration (returning them as apparently clean wealth) — are a teaching aid, not statutory ingredients. Criminals use law firms because solicitors hold client money, create companies and trusts, and complete property and business sales: exactly the activities that can place and layer proceeds.

The global standard-setter is the Financial Action Task Force (FATF). The United Kingdom is a FATF member. FATF Recommendations drive what "adequate" national systems look like: a money-laundering offence covering concealment and arrangements; a suspicious-activity reporting regime with a financial intelligence unit; customer due diligence; beneficial-ownership transparency; and supervision of lawyers, accountants and estate agents as well as banks. The UK's financial intelligence unit sits in the National Crime Agency (NCA).

Domestic law is mainly the Proceeds of Crime Act 2002 (POCA) Part 7 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), as amended after Brexit and by later economic-crime statutes. MLR 2017 originally implemented the EU Fourth Money Laundering Directive and was then amended for the Fifth; the UK now amends the Regulations directly. Terrorist financing is a sibling regime under the Terrorism Act 2000 (notably ss.19 and 21A). The Economic Crime and Corporate Transparency Act 2023 tightens Companies House identity and information-sharing and creates a failure-to-prevent-fraud offence for large organisations; it is part of the same international economic-crime drive, but SQE1 Legal Services names POCA and due diligence, not every neighbouring statute.

Criminal property (POCA s.340) is property that constitutes a person's benefit from criminal conduct, or that represents such a benefit (directly or indirectly, wholly or in part), where the alleged offender knows or suspects that it constitutes or represents such a benefit. Criminal conduct is conduct that is an offence in any part of the United Kingdom, or that would be an offence in a part of the United Kingdom if it occurred there. That is an all-crimes approach: there is no list of "serious enough" predicates for the principal offences. Limited overseas-conduct defences exist in ss.327–329 where the conduct was lawful where it occurred and is not of a description prescribed as still criminal.

SQE1 placement: Annex 4 allows Ethics and Professional Conduct and money-laundering questions to make up to 20% of a sitting, with money-laundering questions assessed in FLK1 only. AML knowledge lives in Legal Services. A conveyancing file can still carry a pervasive ethics wrapper at the same time.

This independent OpenExamPrep section teaches those rules for England and Wales practice. It is not NCA, SRA or Home Office guidance and does not claim official approval. Keep the primary texts open: POCA Part 7; MLR 2017; SRA money-laundering warning notice.

When suspicion should be reported

You report when you know or suspect that another person is engaged in money laundering, and — if you are in the regulated sector — also when you have reasonable grounds for knowing or suspecting (the objective limb in s.330). Suspicion is more than idle speculation and much less than proof. You do not wait for a conviction, a confession, or a complete audit trail.

The SRA warning notice collects the red flags that appear in practice and on FLK1 files:

• large cash payments, or cash that does not match the client's profile;
• unexplained third-party funds, last-minute changes of source of funds, or multiple foreign accounts;
• private funding or loans from non-institutional lenders with no commercial rationale;
• a client who does not want legal advice, only a vehicle, a company, a trust, or a rapid completion;
• opaque beneficial ownership, use of corporate assets for private spending, or a transaction that makes no sense for this client;
• undue haste, a willingness to overpay costs to skip checks, or false or stolen identity documents;
• property bought and quickly resold without a genuine reason;
• connections to a high-risk jurisdiction without a credible explanation.

Worked file. A buyer of a £400,000 suburban freehold says, three days before completion, that the deposit will now arrive in cash from "a family friend who does not like banks", after earlier documents showed a UK mortgage offer. That combination — last-minute change, cash, third party, mismatch with profile — is enough to generate suspicion or reasonable grounds. You do not complete first and "ask questions on Monday".

Litigation-only work is often outside MLR 2017 (see regulation 12 below) but POCA still applies. Bowman v Fels is the usual name of the rule that s.328 does not catch the ordinary conduct of legal proceedings from issue through judgment, including a genuine settlement of those proceedings. It is not a general solicitor exemption from concealing, arrangements, or failure to disclose on a transactional file.

To whom, when, and the procedure

In a firm, the nominated officer (often titled money-laundering reporting officer) is the person appointed to receive internal disclosures. The fee-earner's duty is to disclose to that nominated officer as soon as practicable. The nominated officer evaluates the material. If the nominated officer knows, suspects, or (in the regulated sector) has reasonable grounds, they make a suspicious activity report (SAR) to the NCA. That is the UK financial intelligence unit. The first port of call is not the SRA, not the client, and not a press release. A constable or customs officer can receive an authorised disclosure, but in SRA firms the operational route is nominated officer then NCA.

If you still need to do a prohibited act (the acts in ss.327(1), 328(1) or 329(1) — typically completing, transferring, or remaining concerned in the arrangement), you need appropriate consent, often requested in practice as a defence against money laundering (DAML) through the SAR. Section 335: if you make an authorised disclosure to a constable or customs officer and do not receive a notice of refusal before the end of seven working days starting with the first working day after the disclosure, you are treated as having consent. If a refusal notice arrives in that period, a 31-day moratorium runs from the day you receive the notice. The moratorium can be extended by the court (s.336A). You do not complete during a live refusal/moratorium merely because "we already filed a SAR".

Do not tip off. Section 333A (regulated sector) makes it an offence to disclose that a Part 7 disclosure has been made to a constable, HMRC, a nominated officer or the NCA, or that an investigation is being contemplated or carried out, where the disclosure is likely to prejudice an investigation and the information came in the course of regulated-sector business. Telling the client "we have sent a SAR so completion will be delayed while the NCA thinks about you" is the classic offence. You may say that you cannot complete until outstanding requirements are satisfied, without revealing the SAR. Seeking to dissuade a client from crime, in the limited way the tipping-off defences contemplate, is not a licence to narrate the report.

Authorised disclosures under s.338 do not breach confidentiality restrictions, and a good-faith authorised disclosure attracts a civil-liability shield (s.338(4A)). Code paragraph 6.3 already permits disclosure required or permitted by law. Principle 7 does not require you to complete a criminal arrangement because the client is in a hurry.