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Know Your Client Obligations – A Practical Checklist
This article provides a practical checklist for lawyers on the “know your client” obligations under the Legal Profession (Professional Conduct) Rules. It is the second of a three-part series to remind lawyers of their professional obligations. The first article titled “Advising Clients of Their Duty to Preserve Documents for Discovery in Litigation” was published in the June 2010 issue of the Singapore Law Gazette.
Know your client (“KYC”) procedures are mandated by the Legal Profession (Professional Conduct) Rules (“Rules”) as they assist lawyers to identify high risk clients and transactions in order to avoid inadvertently committing a money laundering offence.
Under r 11I of the Rules, the Council of the Law Society is empowered to conduct inspections of law practices in order to ascertain whether rr 11D to 11H are being complied with. To date, the Council has conducted a number of inspections of law practices.
To assist lawyers to comply with the KYC procedures under rr 11D to 11H of the Rules and the Council’s Practice Direction 1 of 2008 on Prevention of Money Laundering and the Funding of Terrorist Activities (“PD”), the Law Society has prepared a sample KYC checklist appended to this article, which they may adapt for their use as necessary. A soft copy of the checklist may also be downloaded from the Law Society’s website at www.lawsociety.org.sg(Resource Library > Regulatory Matters > Anti-Money Laundering).
A summary of the salient points in the KYC checklist follows.
Where the client is an existing client who has been in regular contact with the Practice for the last five years, the client may either be:
1. a Category A client who provided formal identification to the Practice on first contact; or
2. a Category B client who did not provide formal identification on initial contact but the proprietor or partner or director of the law practice can waive the full KYC check subject to a risk assessment of the client.
For details, see paras 39 to 42 of the PD.
If the client does not fall within section A, the next step is to consider whether the client is an individual who is nationally or internationally known. In such a case, client identity documents are not required if the lawyer/law practice is satisfied on reasonable grounds that an individual is nationally or internationally known. A record of identification must, however, include a file note of the lawyer’s or the law practice’s satisfaction about the individual’s identity and address: see para 36 of the PD.
When a law practice is instructed by another professional advisor, the lawyer would not have any right of direct contact with the client. If the professional advisor has agreed to pay the fees of the law practice and does not instruct the Practice to act in one of five types of matters described in r 11F(1) (see paras 57 to 65 of the PD), the lawyer need not conduct the full KYC check for the client but would need to conduct a due diligence check of the professional advisor. Please also refer to para 24 of the PD.
For new clients who are natural persons, a risk based approach can be used to determine the nature and extent of the information required to establish client identity: see paras 25 and 26 of the PD.
In determining the client’s risk profile, the type of client and the type of transaction undertaken are relevant factors.
For low risk clients, a simplified approach may be taken and the identification documents required for simplified client verification for different types of individuals are set out in the “Notes” portion of Section D for easy reference. A non-exhaustive list of the types of clients who, and transactions which, qualify for simplified due diligence is also set out in the “Notes” portion after Section H in the KYC checklist.
For high risk clients, enhanced due diligence checks must be conducted. The PD does not prescribe the enhanced due diligence checks to be carried out but some guidance is provided at para 43 of the PD. High risk clients include Politically Exposed Persons and dubious clients: see paras 44 and 54 of the PD. High risk transactions include the five types of transactions set out in r 11F of the Rules, receipt of cash of more than S$100,000 to the client account (see para 70 of the PD) and red flag transactions (see para 83 of the PD).
The same risk based approach and the factors in determining the client’s risk profile are applicable to new clients which are corporate entities or unincorporated bodies.
For simplified client verification, the identification documents required for different types of corporate entities or unincorporated bodies are set out in the “Notes” portion of Section E for easy reference. For high risk clients, enhanced due diligence checks must be conducted under para 43 of the PD, such as obtaining details of ownership and control structure of corporations.
A law practice may rely on a third party/intermediary (for example, other legal professionals, auditors or financial institutions) to carry out a client identity check if the four requirements set out in the PD are met. Refer to paras 19 to 21 of the PD for details.
For high risk clients in Section D or E, the additional information obtained about such clients as part of enhanced due diligence checks must be set out in Section G.
In addition, the lawyer or law practice is required to conduct on-going checks for high risk clients.
Section H sets out the various approvals required within the law practice upon completion of the KYC checklist.
Following a KYC checklist would help lawyers to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour or other indicators of money laundering. Lawyers have a duty to report suspicious transactions under r 11G of the Rules.
Not complying with the KYC procedures also renders a lawyer liable to disciplinary proceedings. In Baxendale-Walker v Law Society[2006] EWHC 643 (Admin), a lawyer had given a letter of reference on behalf of a client, Mr Nurkiman, to a bank stating that the latter was known to the lawyer’s firm and had satisfied the identification requirements under the Money Laundering Regulations 1993. The lawyer also confirmed that the client was a person of integrity and good standing.
However, it turned out that the lawyer had no grounds for confirming that Mr Nurkiman was a person of integrity and good standing. Disciplinary proceedings were brought against the lawyer, who claimed in defence that, among other things, he was under pressure to write the reference and believed that Mr Nurkiman was personally known to Mr Xavier, a Malaysian lawyer known to the lawyer.
The Solicitors’ Disciplinary Tribunal rejected the lawyer’s defence and held that his reference was “both improper and unprofessional”, as “[m]embers of the public and organisations such as banks are entitled to expect to be able to trust a solicitor to the ends of the earth.” The lawyer was suspended from practice for three years. The High Court’s decision was subsequently affirmed by the Court of Appeal (see [2008] 1 WLR 426).
Properly conducted KYC procedures would have helped the lawyer in Baxendale-Walker. For example, he should have verified his client’s identity from reliable, independent sources before the solicitor-client relationship was established: see para 14 of the PD. If due diligence checks on the client were unsatisfactory, the lawyer should not accept any further instructions from the client.
Finally, lawyers are reminded that they are required to keep client verification documents and records for a period of five years under r 11H of the Rules. Implementing a KYC checklist would assist lawyers in organizing these documents and records.
For more information on the Law Society’s rules and directions concerning the prevention of money laundering and funding of terrorist activities, refer to http://www.lawsociety.org.sg/running_practice/antiMoney_laund.aspx
Anti Money Laundering Measures Implementation
Conduct Department
The Law Society of Singapore
E-mail:[email protected]