Why is it crucial for lawyers to identify and verify source of funds?

MinervaBy Legal Futures Associate Minerva

The growing number of frauds, tax evasion, investment scams, and money laundering cases across the country has once again turned the spotlight on the importance of complying with anti-money laundering (AML) policies. Nonetheless, financial institutions are not the only ones subjected to anti-money laundering regulations. Law firms are also required to monitor and investigate the source of funds they accept from their clients in legal transactions.

Source of funds: Explained

The term “source of funds” refers to the origins of funds or assets transferred from one owner to another as a part of the business relationship.

As a lawyer, you may already have information about the bank account your client has been using to make payments. However, investigating the source of funds goes beyond collecting financial documents. Law firms must also determine how their client came to possess that money and where it was used.

Identifying source of funds: What to consider

Did you know that regulators visited an average of seven law firms each month during the past year to check up on the compliance of anti-money laundering policies?

According to the latest report by the Solicitors Regulation Authority (SRA), the officials received a total of 273 reports of potential AML violations in the past year. As a result, the authority visited 85 firms to offer guidance on tax-related issues, with more than 150 desk-based reviews taking place. Moreover, the SRA took 29 enforcement actions and issued £160,000 in fines. The officials also made more than 30 suspicious activity reports to the National Crime Agency.

It is no secret that law firms are among the biggest targets for money laundering. Lawyers who handle excessive amounts of funds confidentially are at the risk of non-compliance with the anti-money laundering regulations. It is also worth mentioning that their actions may weaken the public confidence in legal professionals.

While there are many complexities and challenges involved in this process, there are a few things legal professionals must be vigilant about. At the very least, they should question whether the client has provided a logical explanation about the origin of their funds?

They must also analyse the bank statements to determine if the documents clearly represent all the finances and transactions. If there is any suspicious activity, it is imperative to further investigate and bring it to the attention of the higher-ups. To put it simply, as a lawyer, you must be able to explain each legal transaction you have made with your clients. If required, you should also have sufficient evidence to prove that you took every measure to verify the source of funds.

Through the efficient management of your key client data, Minerva provides effective, safe and secure ways in which your law firm can communicate with your clients and meet your compliance obligations.


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