AML Compliance Part 2: Why Banks Can’t Tackle AML Alone

Banks are undoubtedly central to the architecture of anti-money laundering (AML) strategies, thanks to their technological infrastructure and capacity to monitor financial flows. However, their view is inherently limited to the transactions themselves—the debits and credits, the amounts, dates, and sometimes, the entities involved. This transaction-centric view, while critical, misses several layers of complexity that are often hidden within the legal structures and intents that shape these transactions.

Limitations in Understanding Legal Structures

Many money laundering schemes involve intricate legal structures like trusts, shell companies, and offshore entities, which are designed to obscure the true nature and origin of funds. Banks may see the movement of funds into and out of these entities but understanding the legitimacy of these structures or the reasons behind their creation often requires legal expertise. Solicitors, with their knowledge of corporate and trust law, are better equipped to discern whether such structures serve a legitimate purpose or are potentially designed for concealing illicit activities.

The Crucial Role of Solicitors in AML Compliance

Solicitors often handle transactions ripe for money laundering risks, such as real estate acquisitions, creating trusts, and managing large client funds. As professionals who might be the first point of contact in these financial dealings, solicitors are uniquely positioned to act as the first line of defence against money laundering. Their detailed legal knowledge and direct involvement in structuring transactions make them indispensable in identifying and mitigating suspicious activities.

Gaps in Contextual Understanding

Banks process countless transactions daily, driven largely by algorithms that detect patterns known to indicate fraudulent activity. However, without a deeper understanding of the client’s legal and business context, banks might either flag benign activities as suspicious or, conversely, miss subtle signs of money laundering. Solicitors often have a broader view of their client’s overall activities, including legitimate reasons for complex transactions, which can provide essential context to differentiate normal business practices from potential red flags.

Integration of Legal Intent

The intent behind transactions is another area where solicitors can add significant value. For example, the restructuring of a company or the sudden transfer of substantial assets might be completely rational and lawful within a certain legal context, such as estate planning or business succession. Solicitors can provide insights into the intent behind these actions, helping to clarify whether they are economically reasonable or potentially suspicious. This understanding is crucial in assessing risk and intent, something that transaction data alone might not reveal.

Legal Insight in Client Relationships

Solicitors often develop long-standing relationships with their clients, gaining insights into their operations and legal affairs that are not typically visible to banks. This client-attorney relationship can yield critical information regarding the legitimacy of their actions and the origins of their assets. This detailed client knowledge is vital for effective AML practices as it allows for a more informed assessment of transactional risks.

Enhanced Due Diligence

When banks and solicitors collaborate, the enhanced due diligence that results can significantly strengthen AML efforts. Solicitors can verify the information provided by clients and cross-reference this against legal documents and business records, aiding banks in their verification processes. This collaboration ensures a more thorough vetting process, reducing the risk of overlooking disguised illicit activities.

In summary, while banks are indispensable in the identification and monitoring of suspicious financial activities, their efforts alone are not sufficient for a holistic AML approach. The legal insight, client relationship depth, and transactional context that solicitors bring are critical in painting a complete picture of the money laundering risks associated with sophisticated financial and legal structures. Therefore, reinforcing the collaboration between banks and legal professionals is not just beneficial but essential for robust AML enforcement.

Read next: part 3 – Why Collaboration Is Key

Read previous: part 1 – Why Solicitors Can’t Afford To Be On The Sidelines