Law firms each fined £12,000 for AML failures

Risk assessments: Law firm’s were lacking

The Solicitors Regulation Authority (SRA) has fined two law firms over £12,000 each for anti-money laundering (AML) failures.

In the first case, London law firm DKLM failed to carry out proper source of funds checks for a UK property transaction involving two Ukrainian citizens.

In the second, Essex firm Hattens failed to have AML risk assessments in place, both for the firm and individual matters.

In a regulatory settlement agreement with DKLM, based in Shoreditch, the SRA said it had received a complaint from a buyer that the law firm had miscalculated his stamp duty, which as a first-time buyer he should not have paid, and failed to give him a refund.

The house appeared to be undervalued compared to others in the street, and the legal costs high.

The SRA said the transaction involved one Ukrainian citizen buying a UK property from another, with DKLM relying on customer due diligence and source of funds checks “provided by a Ukrainian lawyer, at a Ukrainian law firm”.

The purchase money, totalling £295,000, “did not pass through the firm’s client account, so the firm could not accurately know if those funds had been paid and what scrutiny had been placed on the origin of those funds, before being transferred”.

Instead, the firm “relied upon statements made by the parties that the funds passed between them in the Ukraine”.

The SRA said enhanced customer due diligence was required for the transaction, some of which was applied but “was not sufficiently adequate”.

Client and matter risk assessments were not performed, “or if they were no records of those assessments have been retained by the firm”, and the firm relied for source of funds “on a letter produced by the Ukrainian law firm”.

Following the SRA investigation, the law firm stated that no funds were received in the UK and all financial transactions took place in Ukraine.

“There is no suggestion on the part of the SRA that the transaction involved money laundering or any financial crime.

“The firm has reflected upon the position and with the benefit of hindsight, recognises and accepts the breaches and failings identified within this document, relating to the firm’s due diligence on its client and monies involved in this transaction.”

The SRA said the fine was calculated by applying a rate of 0.4% to the firm’s 2022 calendar year turnover of just over £5m, totalling just over £20,000.

This was reduced to £12,000 when mitigating factors were applied, such as an improved regulatory training regime and co-operation with the SRA. DKLM agreed to pay costs of £1,350.

The SRA said it investigated Hattens Solicitors, based in Grays, following a “proactive virtual AML inspection”.

The law firm stated in May 2020 that it had a firm-wide risk assessment (FWRA) in place, but the SRA found that it did not have one until November 2021.

The SRA described this FWRA as “inadequate” as it “did not adequately explore all of the key elements” as set out in the 2017 money laundering regulations and referred instead to “non-existent legislation”.

When the regulator checked the firm’s files, they revealed “a lack of client/matter risk assessments (CMRAs) on file and, in one case, a lack of understanding of the ownership and control of a company”.

In the first sample of files, several had no CMRAs and others had inadequate CMRAs which were either not completed in full or failed to explain or manage risks. In a further sample of files, eight out of 10 lacked completed CMRAs.

Hattens admitted failing to comply with AML legislation up to March this year.

The SRA said there was no evidence of harm to consumers or third parties “and there is now a lower risk of repetition, since the firm brought itself into compliance in March 2023”.

The fine was based on 1.6% of the firm’s turnover of over £1m, making a total of just under £17,000, reduced by 25% by applying mitigating factors, such as co-operation with the regulator and the fact Hattens is now compliant.

The firm was fined £12,700 and agreed to pay costs of £600.

The SRA’s annual AML report last week highlighted considerable non-compliance in the profession, and it also issued a warning notice on CMRAs after finding that many firms were not routinely completing them.

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