Bogus practices and money laundering rise up SRA’s risk register for law firms

SRA: law firms offering banking facilities

Bogus law firms and money laundering have become two of the biggest current risks to law firms, the Solicitors Regulation Authority (SRA) said yesterday, in publishing its 2014 risk outlook.

The degree to which the main and subsidiary risks have changed since the risk outlook was first published last year show how rapidly the challenges facing law firms can change.

Bogus law firms were not even in last year’s outlook, but earlier this year the SRA revealed that it had received 548 reports about them in 2013, an increase of 57%.

Yesterday’s publication revealed that the number continues to climb, with 235 received in the first four months of 2014. More than half (56%) related to criminals using the identity of existing firms.

The SRA has elevated money laundering arising from inadequate systems and controls over the transfer of money into one of the priority risks in response to the growing number of cases it is handling. While not a new risk, the outlook said “the techniques used and the context in which it takes place are constantly changing and becoming ever more sophisticated”.

It said: “We have seen recent cases where law firms have been profiting from offering banking facilities over and above those required for legal work. This may indicate money laundering and is not permitted under the SRA accounts rules.”

The SRA also said it was concerned about the poor quality of suspicious activity reporting by law firms. In the year to September 2013, solicitors made 3,615 suspicious activity reports to the National Crime Agency (NCA), just 1.1% of all reports. The majority were seeking consent to continue with a transaction.

“An NCA analysis of these reports found a high proportion received from the legal sector were of poor quality,” the SRA said. “Many did not contain enough information about the suspicious activity for the NCA to be able to make a decision about whether the transaction should go ahead.”

The SRA’s other priority risk areas were, as last year, the misuse of money or assets – “high numbers” of which continue to be reported – the lack of a diverse and representative profession and the quality of legal services to vulnerable clients.

Law Society research showing that the pay gap between male and female solicitors increased in 2013, and that at 30% it is higher than in the general working population, had added to its concerns over diversity, the SRA said.

New risks identified as other priority areas – where the risks are present but not as widespread – are cybercrime and a lack of independence. “We have seen cases where pressure from influential clients has compromised firms’ prioritisation of the public interest,” the SRA said.

As last year, improper or abusive litigation was also in this category.

The risk outlook listed key drivers of risk, including financial difficulties, a lack of adequate succession or exit planning, and group contagion.

However, risks arising from a lack of transparency in complex business structures – which were highlighted last year – are not in this year’s outlook. The SRA said: “We continue to monitor this risk, but have seen limited new evidence over the last year for it to remain as a priority.”

Andrew Garbutt, the SRA’s director of risk, said: “We cannot totally eliminate risk, and in fact the market will only innovate and grow if firms take risks. The purpose of the outlook is to ensure firms are aware of the risks they may face and help them to plan ahead.” He said more and more firms are using the outlook as part of their strategic thinking.

Download the 2014 risk outlook here.


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