Current AML weaknesses in law firms
The Solicitors Regulation Authority’s (SRA) 2022-2023 Annual Money Laundering review involved a review of 250 law firms through proactive inspections (177 firms) and desk-based reviews (73 firms), the results of which are indicated below.
- Enforcement was brought against a combined total of 47 firms and individuals.
- £137,402 in fines.
- One individual suspended.
- One individual subject to controls being placed on their employment.
- 24 suspicious activity reports made to the National Crime Agency relating to assets totalling more than £75 million.
After six years of The Money Laundering, Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017 (MLRs 2017) being in force, the SRA has identified that there are still several firms not getting the basics of their firm-wide risk assessment, policies, controls and procedures and customer due diligence right.
Of the inspections and desk-based reviews carried out, only 41 firms (18%) were fully compliant, 115 firms (51%) were partially compliant and 68 (30%) were not compliant.
Of the 47 enforcement outcomes, the following deficiencies were identified:
- In over half the cases, the most common area for breaches were firm-wide Anti-Money Laundering (AML) controls, including incorrect declarations to the SRA in 2020 advising that firms had a firm wide AML risk assessment, which later transpired that they did not.
- Inadequate policies, controls and procedures and staff training.
- Many outcomes concerning the buying and selling of property related to poor customer due diligence. Obtaining inadequate identification and verification of clients at the outset of the relationship, failure in assessing and identifying the risks at client matter level and a failure to perform on-going monitoring of the transactions and to undertake source of funds checks.
- Continued and repeated issues included failure to apply enhanced customer due diligence and enhanced ongoing monitoring, failures to recognise work that brings the firm into scope of the regulation and failing to have sufficient regard to sector wide guidance, red flag indicators (as highlighted in a Financial Action Task Force report) and the SRAs own issued warning notices.
How are breaches able to happen?
The SRA identified three key themes that they believe contributed to the breaches.
- Inadequate importance placed on robust and compliant risk assessments, policies, controls and procedures, which is often due to a lack of attention to this at senior levels within the firm.
- Insufficient supervision or training of fee earners on the regulations and on the firm’s own policies, controls and procedures.
- Not placing sufficient controls in systems and process that allow events to occur unchecked, such as receipt of funds or moving to the next stage in a transaction without an automated ‘stop’ being placed on a transaction until customer due diligence has been completed.
Emerging themes
The SRA are investigating several cases for failure to assess risk at client or matter level.
There is an increased number of cases relating to breaches of the sanctions regime, specifically sanctions placed on Russians and Russian entities. The SRA has advised that they are developing an approach to these cases with the Office of Financial Sanctions Implementation (OFSI) and expect some enforcement actions in the coming year.
The SRA has urged firms to ensure that they are dedicating appropriate resources to preventing money laundering and fostering a culture in which everyone takes this risk seriously.
How we can help
If you wish to discuss your current AML controls and explore ways to improve it, get in touch with Julie James or your usual Crowe contact.
