Red Flag Indicators for Lawyers and Independent Legal Professionals in Pakistan
Financial Monitoring Unit (FMU) Government of Pakistan released a circular outlining Red Flag Indicators for Lawyers, Notaries and Independent Legal Professionals (view here) and note “Lawyers, notaries, other independent legal professionals are subject to AML/CFT obligations when, on behalf of or for a client, they prepare for or engage in a financial transaction in relation to the following activities:
buying and selling of real estate;
managing of client money, securities or other assets;
management of bank, savings or securities accounts;
organisation of contributions for the creation, operation or management of companies;
creation, operation or management of legal persons or arrangements, and buying and selling of business entities.”
Anti-Money Laundering (AML) red flags refer to warning signs that indicate a potential money laundering activity or any other illegal financial activity.
In Pakistan, lawyers have a crucial role in preventing money laundering and other financial crimes by being vigilant and identifying these red flags in their client dealings.
Unexplained Wealth or Sudden Increase in Assets: Clients who suddenly display a significant increase in wealth without any apparent lawful source of income could be an indicator of illegal activities such as money laundering or tax evasion. Lawyers should be cautious of clients who are unable to provide a reasonable explanation for their newfound wealth.
Complex or Unusual Financial Transactions: Complex financial transactions that appear to lack any commercial rationale or lawful purpose should raise suspicions and prompt the lawyer to further investigate the client and the transaction. Instructions by the client for the creation of complicated ownership structures where there is no legitimate or economic reason. Complex or unusual transactions, possibly with unrelated parties. Instructions to a legal practitioner from the client to conduct transactions without legitimate or economic reason or when such transactions are conducted by the client.
Unusual Patterns of Transactions: Transactions that follow unusual patterns or have no apparent business rationale should be viewed with suspicion. For example, multiple small transactions in quick succession that are structured to evade reporting requirements or large transactions that occur frequently with no apparent economic purpose. Client makes large payments to subsidiaries or other entities within the group that do not appear within normal course of business.
Unusual Patterns of Activity: Company has a long period of inactivity following incorporation, followed by a sudden and unexplained increase in financial activities. Client makes payments to other companies with similar or identical directors, shareholders or beneficial owners. Transactions with little commercial logic taking place in the normal course of business or transactions not related to the normal course of business.
Transactions Inconsistent with Known Sources of Income: Clients who are engaged in transactions that are inconsistent with their known sources of income should be viewed with caution. Lawyers should be aware of the client’s financial background, including their occupation, salary, and other sources of income, to determine if the transactions are consistent with their financial profile. Disproportionate amount used for the purchase of real estate/property which is inconsistent with the socio-economic profile of the client. Unusually high levels of assets or unusually large transactions in relation to what might reasonably be expected of clients with a similar profile.
Transactions with No Apparent Economic or Lawful Purpose: Transactions that have no apparent economic or lawful purpose should be viewed with suspicion and prompt the lawyer to investigate further. These could include transactions that are structured to avoid reporting requirements or transactions that are not in line with the client’s known business activities.
Client has relations with companies with nominee shareholders or bearer shares or shell companies which are based at foreign jurisdiction
Reluctance to Provide Information: Clients who are unwilling to provide adequate information about their business or transactions, including their sources of funds, should be viewed with suspicion. Lawyers should be cautious of clients who are evasive or uncooperative when it comes to providing information about their financial dealings.
Company and Shareholder Transparency: Company is registered at an address that is also listed against numerous other companies or legal arrangements, indicating the use of mailbox service. Company beneficial owners, shareholders or directors are also listed as beneficial owners, shareholders or directors in multiple other companies. Situations where advice on the setting up of legal arrangements (trusts/waqf) may be misused to obscure ownership or real economic purpose or where the legal arrangement holds the shares of a company.
Use of an Intermediary: When client insists on using an intermediary (either professional or informal) in all interactions during transactions without sufficient justification additional care and vigilance should be taken with the transaction.
Acting on others Instructions: Clients who appear to be acting on somebody else’s instructions without disclosing the identity of such person will require additional care. Similarly, unexplained delegation of authority by the client by using powers of attorney or where the client avoids personal contact could be an indicator of enhanced risk.
Politically Exposed or High-Risk Profile:Clients who are politically exposed or have a high-risk profile, such as those with a history of corruption, fraud, or other financial crimes, should be viewed with caution. Lawyers should be aware of the client’s reputation and assess the potential risks associated with their transactions.
Involvement of High-Risk Countries: Transactions that involve countries known for money laundering or financial crimes, such as North Korea, Iran, or Syria, should raise suspicions and prompt the lawyer to investigate further. In addition, a client or transaction from a jurisdiction FATF notes as high risk or does have inadequate measures to prevent money laundering and the financing of terrorism, requires countermeasures or Enhanced Client Due Diligence (EDD).
Sanctions — The client or any of its associated person / entity found positive match while screening against UN Security Council Resolutions (UNSCRs).
Reluctance to Follow Standard Anti-Money Laundering Procedures: Clients who display a reluctance to follow standard anti-money laundering procedures, such as those related to due diligence, reporting, and record-keeping, should be viewed with suspicion. When a client asks for short-cuts or applies pressure for ‘speed’ in completing the transaction it is time to apply extra vigilance. Client makes payments to other companies with similar or identical directors, shareholders or beneficial owners.
A Little Extra: Clients who offer to pay unusually high levels of fees for services that would not ordinarily warrant such a premium. Reason for client choosing the legal professional is unclear, given the firm’s size, location or specialization.
Lawyers should be aware of their obligations under the Anti-Money Laundering Act, 2010 and should ensure that their clients comply with these requirements.
Lawyers notaries, other independent legal professionals, play a crucial role in preventing money laundering and other financial crimes by being vigilant and identifying red flags in their client dealings.
They are obligated to report suspicious transactions to the Financial Monitoring Unit as per the Anti-Money Laundering Act, 2010. By being aware of the red flags and following the standard anti-money laundering procedures, lawyers can help prevent the illicit flow of funds and protect the integrity of the financial system.
Visit https://www.avidaml.com/ or email app@avidaml.com to learn more or schedule a demonstration of Avid AML Compliance technology.
Avid AML can assist increase efficiency, improve accuracy, provide a better customer experience and reduce the cost of compliance.
Financial Monitoring Unit (FMU) Disclaimer: These red flags are developed for guidance purpose and may appear suspicious on their own; however, it may be considered that a single red flag would not be a clear indicator of potential Money Laundering or Terrorist Financing activity. A combination of these red flags, in addition to analysis of overall financial activity, business profile and current transactional pattern may indicate that the potential ML / TF activity. While every effort has been made to ensure the accuracy and check all relevant references/ resources, errors and omissions are possible and are expected. Financial Monitoring Unit (FMU), its officers and its stakeholders are not responsible for any mistakes and/or misinterpretation.
