Increasing fines speak to a need for proactive compliance

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Posted by Yazad Bajina, director at Legal Futures Associate Checkboard

Bajina: Reactive, short-term thinking can have serious consequences

Anti-money laundering (AML) is once again in the spotlight. As part of its 2025-30 strategy, launched in March, the Financial Conduct Authority (FCA) wants to tackle what it perceives to be a failure among UK financial institutions to tackle money laundering.

It comes after challenger banks and established institutions alike have been flagged for failing to take a proactive approach to due diligence.

And with dozens of law firms facing five-figure fines for compliance failures, should the legal sector also be heeding the FCA’s warning to stop treating AML as an afterthought?

Falling foul of the auditors

One of the most notable of these fines was received by Barclays. The bank was fined a staggering £42m simply for failing to perform its due diligence until it was too late.

In one case, the FCA found that Barclays had failed to adequately assess money laundering risks when opening an account for an organisation called Stunt & Co. It sat back as Stunt & Co received tens of millions of pounds in illicit funds from a money laundering operation called Fowler Oldfield, failing to perform ongoing monitoring as these transactions took place.

Despite warnings from law enforcement that both firms were under investigation, Barclays only woke up to the threat after it learned the FCA had opened proceedings against NatWest for its own relationship with Fowler Oldfield. For the FCA, this was a clear sign of serious failures in Barclays’ AML procedures.

Barclays is far from alone and the increasing number of fines raises an important question: are these firms negligent or are the rules simply too tough for already harshly regulated institutions to handle?

Proactive, not reactive

Had Barclays done its due diligence in the first place, and continued to conduct ongoing monitoring throughout the client relationship, it would have spotted the red flags as soon as they arose.

In this case, the risk would have been spotted straight away, but in other scenarios the warning signs might not appear until months into the relationship.

Is there anything law firms can learn from this? After all, the demands and pressures of the financial services industry can often be on a totally different scale to, for example, a conveyancing practice.

But Barclays’ experience speaks to two things: firstly, that compliance failures can lead to serious financial penalties and reputational damage; and secondly, that law firms would do well to take note of the FCA’s demand to take a more proactive approach to AML.

Currently, too many firms see the job of compliance as primarily reactive, patching up issues as they arise rather than shoring up the defences to head off threats before they emerge. It’s a bit like the Chinese emperor building his Great Wall only after the Mongol armies have turned up – it’s too little, too late and it leaves them exposed to serious risk.

It’s true that legal and compliance teams are already hard-pressed when it comes to regulations. The government recently declared its intention to relax some of the rules surrounding AML but firms are still increasingly under pressure to meet a whole range of compliance demands.

On the other hand, money laundering remains a major threat to the UK economy. Statistics from the National Crime Agency speak of billions of pounds laundered through UK financial institutions and estate agents every year. Compliance officers very much have their work cut out.

Compliance isn’t an afterthought

This kind of reactive, short-term thinking has had serious consequences for law firms. In the last few months, a number of law firms have faced tens of thousands of pounds worth of SRA fines for due diligence failures.

In July, one East London firm had to pay £78,000 for failing to meet money-laundering regulations for more than six years. And in April alone, the SRA levied 12 fines against practices, including one £36,000 charge for failing to have proper risk assessments in place.

When firms treat due diligence as an afterthought, they leave themselves open to serious criminal risk – and hefty fines from the SRA.

But it’s the example of those financial institutions that should serve as a clear warning of the consequences of improper due diligence: money launderers use the credibility of legal and financial services to slip through the cracks and continue their criminal activities.

Legal practices need to heed the advice of the FCA and take a proactive approach to these threats, embedding due diligence across all their client relationships. That means no seventy grand fines, no regulatory attention and no reputational damage.