Carrot or stick? The future for AML supervision of the legal sector

Guest post by Kathryn Westmore, a senior research fellow at the Centre for Financial Crime and Security at RUSI (the Royal United Services Institute)

Westmore: Focus should be on improving compliance

The events of the last year have resulted an unprecedented focus on the role of the legal sector in enhancing the UK’s reputation as a haven for dirty money.

The sector has long been felt to have a problem with meeting its anti-money laundering (AML) regulatory obligations and there has always been an uneasy tension between AML and other core tenets like professional privilege and the right to legal representation.

The profession’s compliance with the Money Laundering Regulations (MLRs) is overseen by a number of professional body supervisors (PBSs) with the Office of Professional Body Supervisors (OPBAS) established in 2018 to ensure consistency across the supervisors.

This system of supervising lawyers, and indeed other professions like accountants, is, however, in need of a “radical overhaul”, according to an influential group of backbench MPs. The campaign group Spotlight on Corruption has claimed that the UK’s legal sector “escapes effective supervision for money laundering”.

The government has committed to a consultation later in 2023 on the future AML supervisory framework and recognised that “there is more to do”, proposing a number of options for reform in the way that the professions are supervised for AML purposes.

The Economic Crime and Corporate Transparency Bill, currently working its way through the legislative process, has started to move the dial on AML supervision on the legal sector, introducing new fining powers for the Solicitors Regulation Authority (SRA) and Scottish Solicitors’ Discipline Tribunal and a new regulatory objective around preventing economic crime.

It is clear that there are some lawyers and firms who are engaged in what might be, at best, described as ethically dubious conduct; strategic lawsuits against public participation (SLAPPs) being one of the most obvious examples. Moreover, there are also some lawyers who have engaged in outright criminal conduct and convicted under the Proceeds of Crime Act for their role in laundering money for organised crime.

It is also very clear that there remain some poor practices when it comes to AML within the legal sector. In January 2023, the SRA fined a small firm £20,000 for conduct which “showed a disregard for statutory and regulatory obligations and had the potential to cause harm”.

The SRA found that the firm in question had carried out an inadequate AML risk assessment, omitting the higher risk work of conveyancing, which made up 75% of the firm’s business, from its assessment of product risk and had failed to provide training or meet some of the core client due diligence requirements, like verifying the source of funds of third parties.

The firm in question is unlikely to be an outlier in terms of its compliance, or lack thereof, with its AML obligations.

Critics have often blamed the fragmented and inconsistent approach to AML supervision of the legal sector for allowing these types of practices to go unpunished. The reality, though, is that the first two types of behaviour – the legal but shady and the criminal – are not really matters for AML supervisors.

Where firms consistently fail to understand and comply with their basic requirements, then yes, that’s exactly the type of behaviours that the SRA and the other supervisors should be cracking down on.

And there are many, many more firms that simply get things wrong through ignorance, lack of resources or, frankly, a blasé attitude to compliance, than there are firms that are deliberately and willingly facilitating money laundering.

The question then becomes, how do you get the vast majority of lawyers who want to do the right thing but aren’t always sure what that might be onside?

Any radical reforms of the sector are usually predicated on the belief that the reforms will lead to more regulatory action, substantial fines and other penalties. More ‘stick’ than anything else.

The PBSs, by their own admission, generally favour a supervisory approach of engaging with the sector informally rather than more formal routes. There is a place for formal supervisory activity, and it can be used effectively both to punish breaches of the regulations and act as a deterrent to others in the industry.

But as we look forward to the government’s consultation on AML supervision, what it should really be asking is not necessarily how we can increase the number of fines in the sector but what are the effective interventions that will really drive up the level of compliance in the sector.

What tools, information and resources might the sector need to be able to fulfil their obligations that they don’t have at the moment?

Ultimately, how can we empower lawyers to act as an effective first line of defence against criminals, oligarchs and kleptocrats?

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