On 17 December 2020, HM Treasury and the Home Office published the 2020 UK National Risk Assessment (“NRA”) of Money Laundering and Terrorist Financing. This is the UK’s third National Risk Assessment and a key component in its ongoing commitment to combat economic crime. Since the previous NRA in 2017, the Financial Action Task Force (“FATF”) found the UK to have a robust understanding of its money laundering and terrorist financing risks.
The NRA acknowledges that although the UK’s knowledge of the money laundering and terrorist financing risks has improved greatly since 2017 and has in turn led to a strengthened approach, the Government has not yet seen sufficient evidence to support a reduction of risk in any sector. The legal sector continues to be assessed as “high risk” for money laundering exposure and low risk in respect of terrorist financing. The NRA states that that there is no evidence that the risks for the legal sector have changed since 2017, but there is an acknowledgment that the level of supervision of legal practitioners has improved since then.
The Legal Sector Affinity Group “(LSAG”), with guidance from the Solicitors Regulation Authority (‘‘SRA’’) and the UK’s legal sector professional bodies and supervisors, has completed an extensive revision and redraft of the UK AML guidance for the sector. The updated guidance published on 20 January 2021 is awaiting approval by the Treasury and replaces previous versions of the guidance. This updated version of the guidance includes new requirements for firms and builds upon the previous AML guidance. The new guidance implements The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, and incorporates the subsequent amendments implemented in January 2020.
Following on from the NRA, the SRA has published its risk assessment for the legal sector. Under the money laundering regulations, both the NRA and risk assessments developed by the sector supervisors (the SRA for firms in England and Wales) must be taken into account in your own firm’s business wide risk assessment. You should therefore revisit your risk assessment in light of the findings and changes within the latest NRA and (for those to whom it is relevant) the SRA risk assessment. For example, you should consider:
The Legal sector is fraught with AML challenges and risks and, over recent years, the issues have only become more complex and prominent leading to increased concerns and costs for firms navigating and attempting to comply with the previous and updated regulatory requirements. The issues have been compounded by the COVID pandemic with economic and social changes that Firms need to be aware of as this may lead to increased AML risks and some firms having a higher risk tolerance.
The Money Laundering Regulations and guidance changes have led to increases in the number of strict requirements “musts” as well as implementing changes so firms may be required to justify why they have deviated or fell short of supervisory expectations “shoulds”. These changes will require firms to review and implement changes to their AML governance, policies, controls and procedures.
It is important to highlight that the SRA continues to monitor firms very closely and expects them to adhere to all pertinent legal requirements, supervisory expectations, and industry standards. The failure to adhere is likely to lead to disciplinary action including:
With the recent increase in the SRA’s budget for AML supervision and the risk-based firm visits and inspections planned by supervisory bodies such as the SRA, the consensus is that the SRA is committed to raising the bar in regards to firm’s compliance with the AML requirements which is likely to be followed by further inspections and disciplinary action for non-complying firms. Disciplinary action often leads to high costs for firms to remediate the deficiencies, possible damage to their reputation and loss of current and future business.
Our industry leading Economic Crime Advisory team has a wealth of knowledge and diverse expertise, across most regulated sectors. We act as a strategic partner, providing clear advice which is both balanced and constructive. We have experience in reviewing and helping law firm’s to enhance their risk management frameworks, including policies and procedures, business wide risk assessments, customer risk assessments, and the provision of independent and holistic reviews of financial crime frameworks.
Please don’t hesitate to get in touch if you have any queries or for confidential discussion about your AML framework. Contact Fiona Raistrick for more information.