Anti-money laundering: Source of funds checks still a problem
Solicitors’ compliance with anti-money laundering (AML) rules has improved markedly in the past year – but they were still collectively fined £2.6m for failures.
The Solicitors Regulation Authority (SRA) carried out a record 966 AML compliance assessments in the year to 6 April 2026 and the proportion of firms assessed as non-compliant fell from 32% to 22%.
“We have also seen encouraging evidence that firms are increasingly embedding AML requirements into their governance frameworks and day-to-day operations,” said Alexandra Jones, its director of AML.
The regulator’s annual AML report [1] recorded improvements in firm-wide risk assessments (FWRAs), client and matter risk assessments (CMRAs), policies, controls and procedures (PCPs), sanctions controls and proliferation financing risk assessments.
Compliance with FWRAs increased from 47% to 60% and with PCPs from 38% to 54%, while files with non-existent or inadequate CMRAs fell from 16% to 9%.
Out of 6,592 files reviewed, 5% did not contain evidence that the client had been identified and verified, 9% did not have any source of funds checks and, where documents had been gathered, the source of funds had not been scrutinised in 18% of files.
Ms Jones said many of the issues identified related not to the absence of controls, but to the quality and application of those controls in practice – although six firms did not have an FWRA, despite the requirement being over nine years old.
“Source of funds enquiries, risk assessment processes and ongoing monitoring continue to be areas where further improvement is required,” she said.
“Our thematic work on source of funds and source of wealth reinforced the importance of firms not only obtaining evidence but also critically assessing and understanding the information they receive.”
The report said the reduction in non-compliant firms suggested that many “are responding positively to supervisory engagement, guidance, thematic work and wider awareness initiatives”.
The 206 non-compliant firms were referred for investigation, while a further 52 firms were required to put a compliance plan in place to bring them back in line with the rules. Another 473 received letters of engagement to correct certain issues.
In 2025-26, the SRA agreed 145 regulatory settlement agreements fining firms for AML breaches, totalling £2m, and its adjudicators issued a further 14 fines totalling £364,000. Eight AML cases went to the Solicitors Disciplinary Tribunal, leading to one strike-off, one suspension and six fines totalling £228,000, making £2,592,000 in total.
The report said key themes that contributed to breaches included failures to review and refresh AML controls, audit procedures, maintain records and supervise more senior team members.
The SRA also identified insufficient senior management oversight of compliance, inadequate training of fee-earners, and systems and processes “that allow events to happen unchecked, such as the receipt of funds or moving to the next stage in a transaction, rather than an automated ‘stop’ being applied when an element of customer due diligence has not been performed”.
The SRA submitted 24 suspicious activity reports to the National Crime Agency relating to suspected money laundering and terrorist financing concerns identified through its regulatory work; the matters had a combined value exceeding £102m.
During the year, cases relating to a failure to comply with sanctions regimes have tripled, mostly due to human or administrative errors within firms, rather than deliberate misconduct.
The SRA reported one firm to the Office of Financial Sanctions Implementation about a firm acting for a client who was a designated person without the required licence from the office.
The report also recorded a review of 26 large law firms’ independent audits, which showed that 24 had carried one out within the last two years and met the recommendations that came out of them.
Nine firms were nonetheless referred for a desk-based review or inspection because the audits had identified issues with the firms’ AML controls, for example, missing client due diligence on files – but none warranted an investigation.
As of 6 April 2026, 5,422 law firms fell within the scope of the money laundering regulations, around two-thirds of all the firms the SRA authorises.
Alongside the report, the SRA also published new guidance on PCPs [2].