Financial Crime Obligations in the Legal Sector - The Solicitors Regulation Authority (SRA) Maintains Pressure on Firms
There has been, over a number of years, increasing pressure on the UK’s supervisory bodies, to raise the standard of anti-money laundering (AML) compliance and the legal sector is considered to represent a high risk, according to the UK’s National risk assessment of money laundering and terrorist financing.
In this article we discuss the increasing regulation from The Solicitors Regulation Authority (SRA) and the invaluable lessons law firms can learn from the recent FinCEN Files incident in September 2020, outlined in more detail below.
A call for more robust anti-money laundering policies in the legal sector
Solicitors have traditionally been seen as a weak link, with lax policies, procedures, systems, and controls; an attractive avenue for criminals looking for access to the legitimate financial system. Since its establishment in 2007, separating it from the Law Society of England and Wales under the Clementi Principle, the SRA has continued to apply pressure on solicitors for more robust AML frameworks, an endeavour no doubt energised since the creation of the Office for Professional Body AML Supervision (OPBAS).
The recent consultation for the SRA’s 2020/21 Business Plan outlined mandatory AML related Solicitors Qualifying Examinations, as well as an increase in monitoring of AML arrangements. This includes an expansion of the SRA’s AML-related visits to high-risk firms on a three-year rolling basis, along with a sample of lower risk firms. Monthly analysis will be published into firms’ AML policies, procedures, controls, and risk assessments, with thematic reviews into tax advice. The SRA will also increase its AML budget, and undertake a review of the methodology used to risk rate firms, to better target AML oversight, and use finite resource.
The FinCEN Files and lessons to be learnt
As we have all seen and heard, on 20th September 2020, documents were leaked to the public from the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) that included over 200,000 suspicious financial transactions (or Suspicious Activity Reports, SARs), valued at over US$2 trillion, that occurred from 1999 to 2017 across multiple global financial institutions. The information implicated institutions in more than 170 countries who played a role in the facilitation of money laundering and other fraudulent crimes.
While much of the attention from this leak was on financial institutions, a critical weakness in controls identified from this leak was around the process of setting up and utilising shell companies with shadow directors, a process that the previous Panama Papers had highlighted to the public was heavily connected to international law firms. Law firms should be aware of the National Crime Agencies increasing concern of international law firms, particularly around their reporting of suspicion, with the sector continuing to be one of the lowest reporters of SARs, accounting for only 0.58% of all SARs submitted to the NCA*. Law firms should be able to glean invaluable lessons from these leaks and the control weaknesses that they have highlighted in order to ensure that their AML frameworks are bolstered to enable sufficient safeguarding from committing the same mistakes, or falling victim to the same errors and control deficiencies.
Firms should be aware Companies House has recently released details of reforms that it intends to put into place, to make it more difficult for criminals in this respect. The timing of the announcement is interesting, as it indicates that the UK Government may have foreseen that there was a problem, and also the possibility of a data leak.
How should law firms respond?
As such, BDO believes Firms should:
- Ask themselves “is my organisation highlighted in the leaks?”; “is there a direct or indirect link?”
- Assess truthfully the robustness of their Anti-Money Laundering and Counter Terrorist Financing Controls, including full due diligence (at on-boarding and ongoing) of clients and matters, screening of their client and related parties, transaction monitoring, suspicious activity reporting and governance.
Firms can expect letters from their regulators asking if they are involved. They will need to be ready to respond in a timely fashion, with adequate information.
If you would like to read more information about the AML/ CTF responsibilities for solicitor firms in the UK, where firms have fallen short of regulatory expectations over the past few years, the consequences of non-adherence and how BDO can help, please click below.