Alison Matthews and Peter Burrell examine whether electronic client identity checks meet money laundering requirements

Solicitors in many practice areas have had to verify the identity of their clients since 1 March 2004. Verification is in solicitors' interests, apart from being mandatory. Proper systems put up barriers to prevent firms being used by money launderers.


Verifying identity is time-consuming and adds significant costs to the bottom line. However, firms should be keen to improve their systems to obtain and keep new business in a cost-efficient manner, and protect their practices.


Solicitors must verify identity if they undertake 'relevant business', as defined in the Money Laundering Regulations 2003. This includes the practice areas most at risk of being used for money laundering - conveyancing, trust/probate, corporate, tax and insolvency (see regulation 2(2)2(a)-(m)).


Solicitors do not have to verify identity in litigation or when providing legal advice, but many firms verify across all practice areas. If some departments do not verify identity, solicitors should ensure that clients are not surprised by the request for identity when referred to another department. 




Systems


Your systems are in place. You write to each client asking them to attend your offices with their passport and utility bill or other suitable documents (see chapter 3 of the Law Society's Money Laundering Guidance). You check the evidence to satisfy yourself that the person is your client, and ask your secretary to take copies. You certify that the copies are true copies, or make a file note to show you have actually checked identity.


You bear in mind that you can be used for money laundering, as you are familiar with the indicators in chapter 6 of the Law Society's guidance.


But what about clients a solicitor can never meet because they instruct from abroad or the other end of the country, or are simply too busy to visit you during the workday? How should their identity be verified?


Impersonation frauds are increasing, so you do not want clients to risk sending valuable personal documents through the post. Another professional could verify identity, although that increases costs, and other professionals may be reluctant to accept the liability.


What are the costs of manually verifying identity? There are fee-earner/secretarial time costs, photocopying costs and systems to log the information. Is there an easier and cheaper way of complying with the 2003 regulations while protecting the practice?


There has been much discussion about electronic methods of verification. By typing in information and pressing a button, you may find out more about your client in five minutes than you could ever achieve by seeing a passport and utility bill. It may save you money and time - but will it be a universal panacea?


The answer must be 'no'. Electronic verification will be right for some firms but not others. Solicitors should not take the decision to use electronic methods lightly; it will be a commercial decision, taking into account the pros and cons and the likely costs and benefits. If you decide that electronic verification is right for your firm, then consider which system will provide what you want.


For an electronic check to provide satisfactory evidence of identity on its own, it must use data from multiple sources and across time, or incorporate qualitative checks that assess the strength of the information supplied. Data accessed from a single source, such as the electoral roll, will not normally be sufficient.


The 2003 regulations require solicitors to obtain 'satisfactory evidence of identity', but they are not prescriptive. The Law Society's guidance is that electronic verification is an acceptable option, in line with guidance from the joint money laundering steering group.


Issues to consider are:


  • Whether to seek specific consent from the client for an electronic identity check, or whether a clear statement in the terms of business is sufficient. You must still inform the client that the check will take place.


  • Whether or not you would like electronic checks to be corroborated by personal data provided by the client. This may depend on your assessment of the depth, breadth and quality of data provided by the external databases. Remember, you have to be satisfied that you have verified the identity of your client.





    • Electronic checks


    Commercial agencies accessing a range of data sources are available on-line and may provide a composite and comprehensive level of electronic verification through one interface. They use databases of positive and negative information and some also access high-risk alerts, such as the terrorist sanction lists or Interpol.


    Positive information relating to full name, current address and date of birth can prove that an individual exists, but some databases offer a higher degree of confidence than others. Data from more robust sources where you have to prove your identity to be included, such as government departments, should be included.


    Negative information includes lists of individuals known to have committed fraud and deceased persons' registers. Such checks minimise the risk of impersonation fraud.


    Before using a commercial agency for electronic verification, firms should be satisfied that the information supplied by the data provider is considered to be sufficiently extensive, reliable and accurate. The provider should:


  • have proof of registration with the Information Commissioner's Office to store personal data;


  • use a range of positive information sources that can be called on to link an applicant to both current and previous circumstances;


  • access negative information sources, such as databases relating to identity fraud and deceased persons;


  • access a wide range of 'alert' data sources; and


  • have transparent processes that enable the firm to know what checks are carried out, the results of the checks, and what they mean in terms of how much certainty they give on the identity of the subject.



    • Commercial agencies should also have processes that allow solicitors to capture and store the information they use to verify an identity. It is essential that a record - such as a print-out of the search results - is kept of the check made, to show where the evidence of identity has been obtained or so that the evidence can be obtained again.


    An Internet search will provide a range of providers - try searching 'KYC' or 'due diligence'. Different systems offer different products at different prices, such as a price-per-search plus a monthly fee, or fees on a per-user basis.


    Deciding whether electronic verification is right for a firm is likely to depend on volumes, existing costs, and your client base. If you decide that it is the right route for you, consider the criteria outlined here, talk to more than one provider, and talk to other firms. They will often be in an excellent position to offer you further guidance.


    Electronic verification by solicitors is still relatively new. Provided that it is used wisely, it will add to the weapons in the profession's anti-money laundering arsenal.


    Alison Matthews is the money laundering reporting officer at national law firm Irwin Mitchell, and Peter Burrrell is an officer at City-based Herbert Smith. Both are members of the Law Society's money laundering task force