Developments and compliance under fifth anti-money laundering directive

The CashroomBy Legal Futures’ Associate The Cashroom

On 10th January 2020, the fifth anti-money laundering directive (5AMLD) comes into force throughout the UK with the aim of significantly reducing money laundering and terrorist finance.

The legal sector has struggled to fully comply with current regulations since their introduction in 2017.

The Financial Conduct Authority estimates that £37 billion is laundered by criminals in the UK every year and that the total figure, although unknown, could be worth hundreds of billions.

With regulations changing in the new year, we look back at 2019, the difficulties faced by the sector and the impact future changes could have on the legal sector.

Regulatory Frustrations and Legal Sector Challenges

Throughout 2019, regulatory bodies found deep-rooted and ingrained non-compliance throughout the legal sector.

A Solicitors Regulation Authority (SRA) report found a fifth of regulated firms failing to adhere to risk assessment protocols.

Having reviewed 400 firms’ risk assessment approaches to money laundering, 83 (21%) were viewed as non-compliant.

A tenth of the risk assessments used by the observed firms did not cover every element in the 2017 regulations. Furthermore, 10% offered information that differed from the SRA request.

The majority (64%) of observed firms had adopted templates without individualising and adapting them to their firm, their clients and specific risks.

Since the inspection, 7,000 regulated firms have been advised to confirm they have robust and compliant risk assessment procedures in place. The SRA will also conduct more extensive visits in the coming months to ensure firms are prepared for the imminent changes in the new year.

Money laundering has been an historic problem for the legal sector. The SRA investigated 172 law firms for AML non-compliance during this time, highlighting the difficulties faced by law firms.

These investigations culminated in 40 solicitors being struck off, suspended or voluntarily leaving the roll for their non-compliance.

Suspicious wealth is being invested into too many high cost items, like property, in the UK. 400 properties worth in excess of £5 billion has been lost to illicit finance and suspicious wealth. Despite increased regulations concerning politically exposed persons (PEP), 293 properties were purchased by buyers from high-corruption and high-risk jurisdictions using suspicious funds.

Identifying suspicious activity and people deemed as politically exposed has been a long-term difficulty of the sector. Understanding the correct approaches to comply with current regulations has prompted many to act on their instincts. As a result, fewer firms feel the need to complete so many unnecessary SARs.

Overall, the UK read and triaged 5.84% more SARs in 2019 according to the UK Financial Intelligence Unit’s report. However, the property sector has been historically reluctant to complete SARs related due diligence.

The legal sector has been accused of under reporting in the past. However, the 2,774 SARs reports completed in 2019 represented a 4.29% increase from the same report in 2018.

Although the legal sector has been perceived as slow to react to anti-money laundering legislation, there is a clear improvement in following legal compliance processes.

5AMLD and the Impact on Law Firms?

The new directives should not be seen as a way of simply tightening the existing legislation. Law firms need to be aware of the changes and the effect it will have on the sector.

Firstly, letting agents will be included under AML directives for the first time. Firms representing letting agents will need to be aware of the inherent risks involved with buy to let property.

Earlier this year, the National Crime Agency arrested a 43-year-old man named Feng Xu who used 31 false and fraudulent addresses to rent 446 separate addresses which were used by organised crime organisations to conduct nefarious and illegal activity. The current ten thousand euro per month limit may ensure the rental sectors impact is limited. However, the inclusion will help to stem the proliferation of criminal activity.

Importantly, the new directives also provide greater clarity on many ambiguous issues. Moreover, legal service providers will need to ensure they comply with robust due diligence when dealing with clients from high-risk third countries.

The ‘established’ list of countries and insistence on more formal reporting and senior management approval on issues concerning transactions or business relationships involving high-risk countries will help to create a more risk centric and adverse environment.

Clarification on politically exposed people (PEP) has also been sought under the new directive with the Government tasked with publishing an ‘exhaustive’ list of the people and roles it considers as embodying a ‘prominent public function.’

As the world becomes increasingly digital, more people are migrating to digital approaches and investing in digital assets. The directive coming into force in January 2020 will now see firms working with clients involving crypto-assets will be obliged to complete due diligence requirements, and register with the Financial Conduct Authority (FCA).

ID and source of funds verification using electronic and digital services has become embedded as best practice in the new directives and seen as essential in the fight against money laundering.

Many law firms can view the latest directives as a source of increased clarity. Law firms will need to ensure they are prepared for the changes by creating, maintaining and improving their compliance procedures.

The Cashroom are available to offer compliant, cost effective outsourced finance functions to law firms throughout the UK. Whether you require comprehensive legal cashiering servicespayroll or pension services, analytical management accounts or compliance and risk reviews, our experts can help ensure compliance with the SRA Accounts Rules.

If you would like to hear more about how outsourcing legal accountancy can help your firm, speak to one of our advisors today who will point you in the right direction.

If you are regulated within the English and Welsh markets, then please contact:
Alex Holt E: T: 07817 420 466

If you are regulated by the Law Society of Scotland, please contact:
Gregor Angus E: T: 07875 598 593

Find out more information and details on The Cashroom website


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