Financial crime: three key characteristics all new MLROs need

23 November 2015 Kieron Johnson

Money laundering is serious business and so is the business of preventing it. A firm that falls foul of its anti-money laundering obligations may face civil, disciplinary or even criminal sanctions. To keep these risks to a bare minimum, you need to ensure that whomever you appoint as your Money Laundering Reporting Officer (MLRO) is suitably qualified.

Midway through the year, we provided a brief introduction to the role of the MLRO. As we close in on the end of the year, we thought it fitting to flesh-out that information a little bit further.

MLROs play a crucial role in making sure your company complies with anti-money laundering obligations. They also have a hand in making sure your firm minimises its exposure to money laundering risks.

In theory, their job is simple: to report suspected wrongdoing to the National Crime Agency (formerly, the Serious Organised Crime Agency or ‘SOCA’). In practice, however, the execution of their duties is far from a walk in the park.

Given the potentially devastating effect the MLRO’s actions can have on a firm’s reputation, it’s absolutely key that your management carefully considers who they appoint and actively provides them with the necessary support.

Does your business need an MLRO?

Having an MLRO onboard isn’t really a choice.

Regulation 20 of the Money Laundering Regulations 2007 says that firms operating within the regulated sector must appoint an MLRO. For those businesses working outside the sector, they may still need to appoint an MLRO:

  • To make a disclosure for a defence under the main money laundering offences.
  • In connection with suspicions of terrorist funding.

Who should you appoint as the MLRO?

The person appointed as the MLRO will typically vary according to:

  • The firm.
  • The structure of the firm.
  • The size of the firm.

Whilst there are no hard-and-fast rules regarding who should be appointed as your company’s MLRO, there are three qualification ‘must-haves’.

1. Seniority

The new MLRO must hold a senior position in your business.

They must have unfettered access to files so they can put together a bird’s-eye view of your company’s risks, enabling them to design compliance systems and determine whether there is sufficient information to require a disclosure to the National Crime Agency (NCA).

2. Aptitude for risk management

The MLRO needs to have a good understanding of risk assessment and management, which will ensure that your firm’s anti-money laundering system is a balanced one – neither under-compliant (which is dangerous for your business) nor over-compliant (which is burdensome to it).

They also need to appreciate your firm’s appetite for risk and design a system that accommodates this. When assessing risks, the MLRO not only needs to understand the strategies money launderers employ, but must also understand the prevailing culture and working practices of your customers.

This will help the MLRO to make a proper assessment of whether the explanations customers provide in connection with warning signs are reasonable ones, or whether a suspicion remains. Any suspicions that do remain must be reported.

3. Legal professional privilege

The newly-appointed MLRO must have an understanding of legal professional privilege (or otherwise have ready access to someone who does).

When reaching any decision on disclosure to the NCA, the MLRO will need to consider the issue of legal professional privilege, which is a privilege against disclosure. It ensures that lawyers’ clients know that certain documents provided and information conveyed to them cannot be subject to disclosure.

In this way, legal professional privilege respects the client’s fundamental right to be completely open and transparent with their legal adviser (that is, their solicitor, barrister, in-house lawyer and employees) without fear of later disclosure to their detriment. It’s an ‘absolute’ right, so cannot be overridden by any other interest.

Saying that, legal professional privilege doesn’t apply to everything that legal advisers are duty-bound to keep confidential. It only protects confidential communications, which fall under either of two types of legal professional privilege:

  • Advice privilege
  • Litigation privilege

Legal professional privilege is a complicated area of law, but one which the MLRO must have some familiarity with in order to ensure that they’re making reports required by law whilst protecting the client’s human rights.

In addition to these three characteristics, it’s important for the MLRO to be able to effectively manage law enforcement agencies and be sympathetic to the aims of fraud prevention (particularly in relation to the duty to report fraud under the Proceeds of Crime Act 2002).

If your new MLRO ticks all of these boxes, you can rest assured that the future of your business is in safe hands.