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Crypto Assets: Vital Role of Client Due Diligence and Risk Asessments
March 28, 2024

1. Introduction

According to a recent report by The Law Society Gazette, a woman has been found guilty of being involved in large scale money laundering involving cryptocurrency transactions. She was eventually stopped by ‘know your client’ (KYC) questions when she tried to purchase multi-million-pound properties in London, which raised suspicions. The woman was found to be converting large amounts of Bitcoin into cash and other assets on behalf of someone else. As a result, police seized Bitcoin wallets from her, initially valued at over £2 billion.

Andrew Penhale, the chief crown prosecutor, highlighted the increasing use of cryptocurrencies by organised criminals to disguise and transfer assets. This case, involving the largest cryptocurrency seizure in the UK, underscores the significant sums involved in criminal activities facilitated by cryptocurrencies.

Read the full article here: Know Your Client Questions Caught Out Bitcoin Money Launderer.

The importance of ‘know your client’ questions and client and matter risk assessments cannot be overstated in the context of cryptocurrency transactions. This case serves as a prime example of how these measures are critical for identifying and preventing money laundering and other illicit activities. Although, in this instance, the anti-money laundering (AML) procedures were handled correctly, conveyancing has consistently been identified as the area most susceptible to AML procedural failures, with financial penalties sanctioned on firms for anti-money laundering rule breaches on the increase. Therefore, it is essential that firms take their responsibilities seriously and, in all matters, not just those deemed high risk. Read our previous article:

SRA Crackdown on Money Laundering Breaches: Analysis Reveals Surge in Frequency and Severity of Sanctions

2. Client and Matter Risk Assessments

Under its current guidance, there is nothing in either the money laundering regulations or the SRA’s Standards and Regulations to stop you from either accepting crypto assets as payment for services, or as a valid source of legitimate funds. However, this situation will raise questions you must answer, and firms must be mindful of the risks. The guidance includes recommended checks, such as:

  • The source of funds for their original crypto investment, particularly where it was a substantial amount in relation to their income/salary.
  • Claimed profits, given what you know about their initial investment and the changes in price over time.
  • Transactions using publicly available records. Bitcoin and many other crypto assets allow you to use Google to track down transactions involving specific assets or between specific wallets. You will need details of the client’s wallet or the assets held to check them against publicly available transaction databases, e.g., blockchain.com.

Furthermore, part of the Anti-Money Laundering (AML) Regulations requires a business to undertake a formal risk assessment. The predominant purpose is to identify, manage and, where possible, eradicate the potential for firms to be caught up in money laundering, and cryptocurrency considerations form part of this.

Client and matter risk assessments will help you to consider whether you are comfortable acting and, if so, to adjust your internal controls to the appropriate level according to the risk presented. For example, different aspects of your CDD controls may be adjusted to meet the identified risks. Regarding crypto assets, guidance provided by the Legal Sector Affinity Group includes sample questions for matter risk assessments, such as:

  • Does the matter involve new sources of finance – anything unregulated e.g., involving crowd funding platforms or some aspects of bitcoin/cryptocurrencies?

Cryptocurrency should be an immediate high-risk indicator, and firms should report any client seeking to use cryptocurrency as part of their funds to the MLRO for further guidance. Enhanced Client Due Diligence is a must in these circumstances. Understanding how the currency has been financed, and by whom, is the starting point in deciding whether to allow a matter to proceed.

In a previous warning notice, the regulator highlighted that they are still seeing a persistent level of non-compliant client/matter risk assessments, and this remains an area where improvement is necessary. Fines are still being sanctioned on those firms failing to meet these obligations, and only recently, a Falmouth law firm was fined over £20,000 plus costs for failing to conduct adequate Client Matter Risk Assessments (CMRA) and not having compliant Policies, Controls, and Procedures (PCPs) in place.

Further resources and articles:

3. How can The Strategic Partner enhance my understanding of Cryptocurrency and AML Regulations?

When performed correctly, risk assessments provide valuable insight into a client and protect firms from exposure to Money Laundering, Terrorist Financing, and Risk.

At The Strategic Partner, we work with firms, their MLROs, MLCOs, and their COLPs and COFAs to provide tailored training and outsourced support solutions. Our objective is to help these firms effectively manage risk, compliance, and regulation. By establishing and maintaining a compliant structure, we aim to enable firms, their managers, and owners to concentrate on operating their businesses and delivering exceptional service to their clients.

If you believe your firm may be at risk, or wish to confirm your firm is achieving the required standard, we can offer expert guidance and support, including:

  • Our Risk Assessment Service and Independent AML Audit reviews the firm’s approach to regulation and compliance, including all regulatory requirements and AML procedures. The output provides the firm with a written gap analysis and solutions to remedy any issues.
  • Our Risk, Regulation and Compliance Service (including AML) provides firms with the necessary Policies, Controls, and Procedures (PCPs), training, supervision structure, and annual independent assessment and reporting. This solution ensures firms, and their staff, are compliant and remain so. It also makes it clear what to do in the event of a mistake and/or if a breach occurs.
  • Our Risk, Compliance, AML Guidance and Register Administration Service provides an outsourced solution for firms where The Strategic Partner not only manages and maintains the risk registers, taking reports from all staff (including Partners), but additionally provides advice on an ongoing basis, and provides a monthly compliance report.

4. Get in Touch with The Strategic Partner

For more information on The Strategic Partner, to discuss how we may be able to assist in accelerating your risk management, compliance, and regulation, or simply to keep this up to date, call us on 020 3911 9710 or email us at info@thestrategicpartner.co.uk.

View/download the PDF version of this article here.

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