Money laundering: Over-reliance on templates
The Solicitors Regulation Authority (SRA) is to check 7,000 law firms’ compliance with anti-money laundering (AML) regulations after an initial sweep found that too many were not complying.
It has also identified a problem with firms using template risk assessments, such as different practices submitting “near-identical” assessments.
The regulator wrote to 400 firms earlier this year asking them to demonstrate compliance with the 2017 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations by sending their firm risk assessments.
This followed a thematic review of solicitors [1] that carry out trust and company services work, which found that a “significant minority” of practices were failing to do enough to tackle money laundering.
All responded but 21% were not compliant – they either did not address all the risk areas required (43), or they sent over something other than a firm risk assessment (40), such as a client or matter risk assessment.
These firms will face enforcement action if they do not comply “promptly”, the SRA said.
The SRA found that nearly two-thirds of firms (64%) were using templates and that their risk assessments were generally of lower quality as a result.
“Templates can be helpful, but too many firms appeared to take a ‘copy and paste’ approach, without thinking through the specific risks and issues faced by their firm,” it said.
An update to the warning notice issued by the SRA in May added that some of the templates were prepopulated with specimen text.
“In some cases, near-identical risk assessments were submitted by different firms, something that is particularly concerning.
“Of those risk assessments that are in place, we are seeing that many do not take into account the minimum risks that the regulations require firms to consider. In particular we are seeing a high number of risk assessments that do not consider: factors relating to doing business with clients from high-risk jurisdictions, transactions, or the delivery method of their services.”
The regulator found that many firms did not understand their responsibilities when dealing with politically exposed persons (PEPs) and their close associates and family members.
“Stating that your firm does not provide services to PEPs, as many firms have done, does not address the need to be able to identify PEPs and to put in place appropriate controls.”
The SRA was also concerned that 38% of the risk assessments were dated recently: “Although this could reflect an update of an earlier assessment, this suggests some firms may have only created one in response to the SRA’s request and therefore some firms may not have an existing risk assessment.”
The SRA has also published additional support, including guidance, checklists and a suggested template that “reflects the learning from firms’ template submissions to the review exercise”.
As a result of its findings, the SRA said it would shortly write to the 7,000 firms that fall under the scope of the Money Laundering Regulations to ask them to confirm they have a firm risk assessment in place.
It will also be carrying out an “extensive programme of targeted, in-depth visits to firms and calling in more firms’ risk assessments”.
Chief executive Paul Philip said: “The damage money laundering does to society means that every solicitor must be fully committed to preventing it. The vast majority would never intend to get involved in criminal activities, but poor processes open the door to money launderers.
“A call from us should not be the prompt for a firm to get their act together. You need to take immediate action now if you are not on top of your money laundering risks. Where we have serious concerns, we will take strong action.”
At the same time, the SRA’s annual Risk Outlook, published today, shows the number of investigations linked to anti-money laundering compliance is falling; it began 172 in the first three quarters of 2019, compared to 314 in the same period in 2018.
In the last five years, more than 60 AML cases have gone to the Solicitors Disciplinary Tribunal, leading to more than 40 solicitors being struck off, suspended from practice or voluntarily coming off the roll.
The outlook also highlights that new EU money laundering regulations are due to come into force by 10 January 2020 and that firms will need to ensure they comply with them.
The risk outlook also revealed that:
- In the first six months of 2019, law firms reported a loss of £731,250 of client money as a result of cyber-crime;
- The SRA began 37 investigations into reports of sexual harassment in the first nine months of 2019, compared to 62 in the same period in 2018;
- In the first three quarters of 2019, the SRA began investigations into 30 cases involving questionable investment schemes, compared to 27 in the same period in 2018; and
- The SRA took regulatory action on 28 personal injury cases in the first nine months of the year, referring 15 to the tribunal. In 2018, the figures were 40 and 15 respectively.
Last week, a Transparency International report claimed [2] that dozens of UK law firms were providing corrupt individuals with services that enabled them to “move, hide and defend their ill-gotten gains with impunity”, and questioned whether the SRA was doing enough to tackle the issue.