Red flags specific to legal professionals

We have identified the following specific red flags relevant to legal professionals:

• The transaction is unusual, e.g.:
  • the type of operation being notarised is clearly inconsistent with the size, age, or activity of the legal entity or natural person acting;
  • the transactions are unusual because of their size, nature, frequency, or manner of execution;
  • there are remarkable and highly significant differences between the declared price and the approximate actual values in accordance with any reference which could give an approximate idea of this value or in the judgement of the legal professional;
  • a non-profit organisation requests services for purposes or transactions not compatible with those declared or not typical for that body.
  • the transaction involves a disproportional amount of private funding, bearer cheques or cash, especially if it is inconsistent with the socio-economic profile of the individual or the company’s economic profile.
• The customer or third party is contributing a significant sum in cash as collateral provided by the borrower/debtor rather than simply using those funds directly, without logical explanation.
• The source of funds is unusual:
  • third party funding either for the transaction or for fees/taxes involved with no apparent connection or legitimate explanation;
  • funds received from or sent to a foreign country when there is no apparent connection between the country and the client;
  • funds received from or sent to high-risk countries.
• The client is using multiple bank accounts or foreign accounts without good reason.
• Private expenditure is funded by a company, business or government.
• Selecting the method of payment has been deferred to a date very close to the time of notarisation, in a jurisdiction where the method of payment is usually included in the contract, particularly if no guarantee securing the payment is established, without a logical explanation.
• An unusually short repayment period has been set without logical explanation.
• Mortgages are repeatedly repaid significantly prior to the initially agreed maturity date, with no logical explanation.
• The asset is purchased with cash and then rapidly used as collateral for a loan.
• There is a request to change the payment procedures previously agreed upon without logical explanation, especially when payment instruments are suggested that are not appropriate for the common practice used for the ordered transaction.
• Finance is provided by a lender, either a natural or legal person, other than a credit institution, with no logical explanation or economic justification.
• The collateral being provided for the transaction is currently located in a high-risk country.
• There has been a significant increase in capital for a recently incorporated company or successive contributions over a short period of time to the same company, with no logical explanation.
• There has been an increase in capital from a foreign country, which either has no relationship to the company or is high risk.
• The company receives an injection of capital or assets in kind that is excessively high in comparison with the business, size or market value of the company performing, with no logical explanation.
• There is an excessively high or low price attached to the securities transferred, with regard to any circumstance indicating such an excess (e.g. volume of revenue, trade or business, premises, size, knowledge of declaration of systematic losses or gains) or with regard to the sum declared in another operation.
• Large financial transactions, especially if requested by recently created companies, where these transactions are not justified by the corporate purpose, the activity of the customer or the possible group of companies to which it belongs or other justifiable reasons.

Customer

• Clients are PEPs and persons closely associated with or related to PEPs.
• Clients conducting their business relationship or requesting services in unusual or unconventional circumstances (as evaluated in all the circumstances of the representation).
• Clients where the structure or nature of the entity or relationship makes it difficult to identify in a timely manner the true beneficial owner or controlling interests or clients attempting to obscure understanding of their business, ownership or the nature of their transactions, such as:
  • Unexplained use of shell and shelf companies, front company, legal entities with ownership through nominee shares or bearer shares, control through nominee and corporate directors, legal persons or legal arrangements, splitting company incorporation and asset administration over different countries, all without any apparent legal or legitimate tax, business, economic or other reason.
  • Unexplained use of informal arrangements such as family or close associates acting as nominee shareholders or directors.
  • Unusual complexity in control or ownership structures without a clear explanation.
• Client companies that operate a considerable part of their business in or have major subsidiaries in countries that may pose higher geographic risk.
• Clients that are cash (and/or cash equivalent) intensive businesses. These may include, for example:
  • Money or Value Transfer Services (MVTS) businesses (e.g. remittance houses, currency exchange houses, casas de cambio, centros cambiarios, remisores de fondos, bureaux de change, money transfer agents and bank note traders or other businesses offering money transfer facilities). Where such clients (e.g. MVTS providers) are themselves subject to and regulated for a full range of AML/CFT requirements consistent with the FATF Recommendations, this will aid to mitigate the risks.
  • Operators, brokers and others providing services in virtual assets.
  • Casinos, betting houses and other gambling related institutions and activities.
• Businesses that while not normally cash intensive appear to have substantial amounts of cash.
• Businesses that rely heavily on new technologies (e.g. online trading platform) may have inherent vulnerabilities to exploitation by criminals, especially those not regulated for AML/CFT.
• Charities and other “not for profit” organisations (NPOs) that are not subject to monitoring or supervision (especially those operating on a “cross-border” basis) on a RBA by designated competent authorities or SRBs.
• Clients using financial intermediaries, financial institutions or legal professionals that are not subject to adequate AML/CFT laws and measures and that are not adequately supervised by competent authorities or SRBs.
• Clients who appear to be acting on somebody else’s instructions without disclosing the identity of such person.
• Clients who appear to actively and inexplicably avoid face-to-face meetings or who provide instructions intermittently without legitimate reasons and are otherwise evasive or very difficult to reach, when this would normally be expected.
• Clients who request that transactions be completed in unusually tight or accelerated timeframes without a reasonable explanation for accelerating the transaction, which would make it difficult or impossible for the legal professionals to perform a proper risk assessment.
• Clients having convictions for proceeds generating crimes who instruct the legal professional (who has actual knowledge of such convictions) to undertake specified activities on their behalf.
• Clients who have no address, or who have multiple addresses without legitimate reasons.
• Clients who have funds that are obviously and inexplicably disproportionate to their circumstances (e.g. their age, income, occupation or wealth).
• Clients who change their settlement or execution instructions without appropriate explanation.
• Clients who change their means of payment for a transaction at the last minute and without justification (or with suspect justification), or where there is an unexplained lack of information or transparency in the transaction. This risk extends to situations where last minute changes are made to enable funds to be paid in from/out to a third party.
• Clients who insist, without reasonable explanation, that transactions be effected exclusively or mainly through the use of virtual assets for the purpose of preserving their anonymity.
• Clients who offer to pay unusually high levels of fees for services that would not ordinarily warrant such a premium. However, bona fide and appropriate contingency fee arrangements, where a legal professional may receive a significant premium for a successful representation, should not be considered a risk factor.
• Unusually high levels of assets or unusually large transactions compared to what might reasonably be expected of clients with a similar profile may indicate that a client not otherwise seen as higher risk should be treated as such. Conversely, low levels of assets or low value transactions involving a client that would otherwise appear to be higher risk might allow for a legal professional to treat the client as lower risk.
• Certain transactions, structures, geographical location, international activities or other factors that are not consistent with the legal professional’s understanding of the client’s business or economic situation.
• The legal professional’s client base includes industries or sectors where opportunities for ML/TF are particularly prevalent.
• Clients who apply for residence rights or citizenship in a jurisdiction in exchange for capital transfers, purchase of property or government bonds, or investment in corporate entities in that jurisdiction.
• Clients who are suspected to be engaged in falsifying activities through the use of false loans, false invoices, and misleading naming conventions.
• The relationship between employee numbers/structure and nature of the business is divergent from the industry norm (e.g. the turnover of a company is unreasonably high considering the number of employees and assets compared to similar businesses).
• Client seeking advice or implementation of an arrangement that has indicators of a tax evasion purpose, whether identified as the client’s express purpose, in connection with a known tax evasion scheme or based on other indicators from the nature of the transaction.
• The transfer of the seat of a company to another jurisdiction without any genuine economic activity in the country of destination poses a risk of creation of shell companies that might be used to obscure beneficial ownership.
• Sudden activity from a previously dormant client without clear explanation.
• Client starts or develops an enterprise with unexpected profile or abnormal business cycles or client is entrant into new/emerging markets. Organised criminality generally does not have to raise capital/debt, often making them first into a new market, especially where this market may be retail/cash intensive. Indicators that client does not wish to obtain necessary governmental approvals/filings.
• Reason for client choosing the firm is unclear, given the firm’s size, location or specialisation.
• Frequent or unexplained change of professional adviser(s) or members of management.
• The client is reluctant to provide all the relevant information or legal professionals have reasonable doubt that the provided information is correct or sufficient.

Transaction/Service

• Services where legal professionals, effectively acting as financial intermediaries, handle the receipt and transmission of funds through accounts they control in the act of facilitating a business transaction.
• Services that allow clients to deposit/transfer funds through the legal professional’s trust account that are not tied to a transaction for which the legal professional is performing or carrying out activities specified in R.22.
• Services where the client may request financial transactions to occur outside of the legal professional’s trust account (the account held by the legal professional for the client) (e.g., through the firms general account and/or a personal or business account held by the legal professional himself/herself).
• Services where legal professionals may in practice represent or assure the client’s standing, reputation and credibility to third parties, without a commensurate knowledge of the client’s affairs.
• Services that improperly conceal beneficial ownership from competent authorities, or that have the effect of improperly concealing beneficial ownership.
• Services that rely heavily on new technologies (e.g. online trading platform) that may have inherent vulnerabilities to exploitation by criminals.
• Transfer of real estate or other high value goods or assets between parties in a time period that is unusually short for similar transactions with no apparent legal, tax, business, economic or other legitimate reason.
• Payments received from un-associated or unknown third parties and payments in cash where this would not be a typical method of payment.
• Transactions where it is readily apparent to the legal professional that there is inadequate consideration, especially where the client does not identify legitimate reasons for the amount of the consideration.
• Administrative arrangements concerning estates where the deceased was known to the legal professional as being a person who had been convicted of proceeds generating crimes.
• The use of shell companies, companies with ownership through nominee shares or bearer shares and control through nominee and corporate directors without apparent legal, tax, business, economic or other legitimate reason.
• Situations where advice on the setting up of legal arrangements may be misused to obscure ownership or real economic purpose (including changes of name/corporate seat or on establishing complex group structures). This might include advising in relation to a discretionary trust that gives the trustee discretionary power to name a class of beneficiaries that does not include the real beneficiary (e.g. naming a charity as the sole discretionary beneficiary initially with a view to adding the real beneficiaries at a later stage).  It might also include situations where a trust is set up for the purpose of managing shares in a company with the intention of making it more difficult to determine the beneficiaries of assets managed by the trust.
• Services that deliberately have been provided or depend upon more anonymity in the client identity or participants than is normal under the circumstances and experience of the legal professional.
• Settlement of default judgments or alternative dispute resolutions is made in an atypical manner (e.g. if satisfaction of a settlement or judgment debt is made too readily).
• Use of virtual assets and other anonymous means of payment and wealth transfer within the transaction without apparent legal, tax, business, economic or other legitimate reason.
• Transactions using unusual means of payment (e.g. precious metals or stones).
• The postponement of a payment for an asset or service delivered immediately to a date far from the moment at which payment would normally be expected to occur, without appropriate assurances that payment will be made.
• Unexplained establishment of unusual provisions in credit arrangements that do not reflect the commercial position between the parties. Arrangements that may be abused in this way might include unusually short/long amortisation periods, interest rates materially above/below market rates, or unexplained repeated cancellations of promissory notes/mortgages or other security instruments substantially ahead of the maturity date initially agreed.
• Contributions or transfers of goods that are inherently difficult to value (e.g. jewels, precious stones, objects of art or antiques, virtual assets), where this is not common for the type of client, transaction or with the legal professional’s normal course of business, such as a transfer to a corporate entity, or generally without any appropriate explanation.
• Successive capital or other contributions in a short period of time to the same entity with no apparent legal, tax, business, economic or other legitimate reason.
• Acquisitions of businesses in liquidation with no apparent legal, tax, business, economic or other legitimate reason.
• Power of representation given in unusual conditions (e.g. when it is granted irrevocably or in relation to specific assets) and the stated reasons for these conditions are unclear or illogical.
• Transactions involving closely connected persons and for which the client and/or its financial advisors provide inconsistent or irrational explanations and are subsequently unwilling or unable to explain by reference to legal, tax, business, economic or other legitimate reason.
• Legal persons that, as a separate business, offer TCSP services should have regard to the TCSP Guidance, even if such legal persons are owned or operated by legal professionals. Legal professionals, however, who offer TCSP services should have regard to this Guidance, and should consider customer or service risks related to TCSPs such as the following:
  • Unexplained delegation of authority by the client through the use of powers of attorney, mixed boards and representative offices.
  • Provision of registered office facilities and nominee directorships without proper explanations.
  • Unexplained use of discretionary trusts.
• In the case of express trusts, an unexplained relationship between a settlor and beneficiaries with a vested right, other beneficiaries and persons who are the object of a power.
• In the case of an express trust, an unexplained (where explanation is warranted) nature of classes of beneficiaries and classes within an expression of wishes.
• Services where the legal professional acts as a trustee/director that allows the client’s identity to remain anonymous.
• Situations where a nominee is being used (e.g. friend or family member is named as owner of property/assets where it is clear that the family member/friend is receiving instructions from the beneficial owner), with no apparent legal, tax, business, economic or other legitimate reason.
• Unexplained (where explanation is warranted) use of pooled client accounts or safe custody of client money or assets or bearer shares, where allowed.
• Commercial, private, or real property transactions or services to be carried out by the client with no apparent legitimate business, economic, tax, family governance, or legal reasons.
• Suspicion of fraudulent transactions or transactions which are improperly accounted These might include:
  • Over and under invoicing of goods/services.
  • Multiple invoicing of the same goods/services.
  • Falsely described goods/services
  • Over and under shipments (e.g. false entries on bills of lading).
  • Multiple trading of goods/services.