A matter of identification

The Proceeds of Crime Act 2002 and the imminent introduction of the Money Laundering Regulations 2003 have focused lawyers' attention on the significance of client identification.

This formal need to identify clients has shed light on the fact that in the past some firms, which have not asked for identification, have ended up being misled by their clients and even had claims made against their professional indemnity insurance.

Despite this, several solicitors have balked at asking clients for proof of identity.

They worry that it appears bureaucratic and unnecessary, particularly where no transactional work is being undertaken.

It is critical to know with whom you are contracting under the terms of your retainer letter, to whom you owe obligations, and who will be responsible for paying your fees.

Particular areas of concern which need to be properly checked are:

- Clients who say they are acting on their own behalf but it appears in the course of the transaction that the money involved is not exclusively their own, or not theirs at all.

Sometimes these situations are caused by cultural differences.

UK law places great emphasis on individual property rights, whereas other cultures may not distinguish between the individual rights and that of a collective family, so it does not appear to the client to matter that the name on the papers does not relate to the 'owner'.

- Clients whose names are difficult to remember or identify from the documents produced, for example where the same name is repeated twice in a passport or you cannot tell which name the client normally uses.

It may not be clear that the same person is acting throughout the transaction.

- Commercial clients who start instructing the firm in the name of one company or business but then use another company name during the transaction.

- Referrals - where the solicitor is asked to provide advice to another professional adviser but never has contact with the client.

Whether the solicitor is acting directly for the client or professional adviser may not be apparent.

Even if the professional adviser has agreed to pay the fees, the solicitor will still need to understand the basics of the transaction the client is undertaking to comply with the anti-money laundering regime.

Not all cases are suspicious and it may be possible to clarify the identity of the client and take further identification and instructions from the new or true client, but it will be necessary to reconsider the retainer letter and to whom it should be issued.

There may well then be implications for liability for the firm's costs prior to that period of clarification.

These checks might seem time consuming, but they are preferable to being hit with costly negligence claims, or being refused a licence to practise.

This column was prepared by AFP Consulting, a division of Alexander Forbes Risk Services