AML: Big rise in SRA activity
Nearly a third of law firms checked by the Solicitors Regulation Authority (SRA) for their approach to anti-money laundering in the past year were non-compliant.
The regulator’s annual AML report showed too that fines for breaches totalled nearly £1.5m in the year to 5 April.
It comes in the wake of the government deciding to move oversight of all lawyers’ AML activities to the Financial Conduct Authority, a decision the SRA said was disappointing.
As of 5 April, 5,569 of the 9,149 firms authorised by the SRA fell within the scope of the AML regulations.
Of those, a record 864 saw an assessment of their AML controls through either an inspection, a desk-based review, or an evaluation of their independent audit.
As a sign of how the regulator has increased its work in this area, this compared to 545 in the previous year, and 273 the year before that.
The SRA engaged with a further 71 firms through thematic reviews.
In all, only 112 (13%) of the 833 firms given a rating were fully compliant – compared with 22% last year – 451 (54%) partially compliant, and 270 (32%) not compliant, up from 23% in 2023/24.
Partial compliance comprises both firms generally doing a good job but falling short in some areas, and those either not fully compliant in a number of areas or where the level of non-compliance in one area is significant.
The former receive a ‘letter of engagement’ that explains how to become fully compliant and the latter a compliance plan, setting out a series of actions they need to take, and by when, which the SRA monitors to ensure they are done.
Non-compliant firms, which are failing to meet core AML requirements, are referred to investigation.
Following investigations, the SRA issued 64 letters of advice or warning and 73 fines totalling £953,333. A further 14 matters went to the Solicitors Disciplinary Tribunal, resulting in 13 fines amounting to £545,650. All fines go to HM Treasury.
This total of 151 enforcement actions was nearly twice as many as the year before (78) and more than three times the number in 2022/23 (47).
The report said that most common AML failure was not carrying out client and matter risk assessments (CMRA) – half of the firms deemed non-complaint were referred for a lack of these on their files.
Many had a process in place but it was not being followed, “showing a disconnect between the policies, controls and procedures and what is happening at matter level”.
Of the 5,873 files reviewed in the year, 16% either had no or an incomplete CMRA, while 39% were ‘ineffective’, such as by focusing on operational, rather than AML, risks.
Only 47% of firms had a compliant firm-wide risk assessment – although this was up from 43% last year – while not having adequate AML policies, controls and procedures was the other major shortcoming.
The SRA saw an increase too in the number of failures to carry out source of funds checks – 10% of files did not have them – and to carry out or record ID and/or verification checks of clients (6% of files).
Other recurring issues included a failure to apply enhanced customer due diligence and enhanced ongoing monitoring and not recognising work that brought a firm into scope of the AML regulations.
The reasons for this were law firm leaders not treating AML seriously enough, inadequate supervision or training of fee-earners, and “having systems and processes that allow events to happen unchecked, such as receipt of funds or moving to the next stage in the transaction (rather than an automated ‘stop’ being put to a transaction when an element of customer due diligence has not been performed)”.
In the year, the SRA itself submitted 19 suspicious activity reports to the National Crime Agency involving more than £148m in suspected criminal proceeds. Nearly three-quarters of these (73%) concerned conveyancing.
The SRA carried out a review of the independent audits commissioned by 25 large law firms and was generally happy with them. Only one did not look at a sample of files – “Our opinion is that it is difficult to evidence the effectiveness of AML controls without a review of files” – and all had met the recommendations from their most recent audits. However
Though six of the firms were referred for a desk-based review or inspection by the SRA because of the issues identified in the audits, none were passed on for investigation.
When it came to sanctions – which apply to all law firms – 86% had assessed their firm’s exposure to sanctions risk in writing, 14% had clients with links to a sanctioned country, and 28% provided advice or services in legal areas with heightened sanctions risk. Fewer than 1% had undertaken work for a designated person in the previous 12 months.
Of the 47 sanctions inspections the SRA conducted, 38 were compliant and only two non-compliant. Five of the six firms referred for investigation related to either a breach of a licence or a failure to report frozen funds correctly.
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