Checks: Cultural concerns inhibit solicitors
Law firms need greater clarity on when and how source of funds and wealth checks should be carried out, a review by the Solicitors Regulation Authority (SRA) has found.
Client reluctance to share financial information due to cultural or privacy concerns, along with “fee-earner hesitation about offending long-standing clients” were other barriers to compliance, according to a thematic review published this month.
The regulator looked at three years of its supervision work, and engaged with 19 law firms of various sizes – from sole practitioners to the largest firms – to better understand how checks were carried out in practice and the challenges firms faced.
Whilst awareness was “good”, the SRA found evidence of significant non-compliance. In 2023-24, a quarter of the 2,701 files reviewed which required checks did not contain information or evidence that they had been done.
In 2024-25, 11% of 5,026 files did not contain any checks, while the information received was not adequately scrutinised in a further 18%.
In 8% of files, the source of funds recorded in the ledger was not supported by the evidence collected.
“Firms should maintain a clear and documented audit trail setting out their approach to source of funds on each matter,” the review said.
“This should include a rationale explaining why the approach taken was proportionate to the degree of risk. Where source of funds checks are not carried out, the audit trail must include an explanation of why the firm considered the checks unnecessary.”
But the SRA acknowledged “a clear need for greater clarity” on when and how source of funds and wealth checks should be carried out.
“While the regulations require firms to adopt a risk-based approach, many firms we engage with continue to express uncertainty about what constitutes a ‘necessary’ check under the MLR [Money Laundering Regulations] 2017.
“This feedback, also reflected in HM Treasury’s recent consultation response, highlights a broader call from the profession for more illustrative and practical guidance.”
HM Treasury has decided not to change the wording of the regulations, so as “to preserve flexibility”, but urged regulators to provide sector-specific guidance.
The SRA said professional judgement remained “central” to applying the rules in context, “but we will be working with HM Treasury and stakeholders to examine the existing guidance to help firms apply that judgment with greater confidence and consistency”.
Ultimately, though, “it will be for firms to ensure they apply the guidance appropriately within their own risk-based frameworks”.
The review acknowledged how time-consuming checks could be, while not all firms were aware that they could pass on the costs of customer due diligence on to their clients – so long as they were clearly stated in their terms and conditions.
There could be a reluctance among clients to disclose financial information “due to their cultural beliefs regarding the discussion of money and personal wealth”. Some clients could be reluctant as well to engage with electronic tools firms use to conduct checks.
The SRA also identified instances where fee-earners were concerned about upsetting clients by undertaking checks “because they were long-standing clients or because of the cultural beliefs of the clients”.
The review highlighted good and bad practice, noting how the requirement to do source of funds checks could apply even if no money was coming through the client account, such as if a transaction only involved the movement of assets for nil consideration, or where firms were only instructed to assist in drafting the documentation to transfer property.
“This can pose a high risk of money laundering because it can be used by criminals to move their assets to other parties to obscure the link between the assets and themselves. Ultimately, this may prevent the transferred asset from being confiscated by the authorities under [the Proceeds of Crime Act] 2002.
“While no funds will pass through the firm’s client account, if the transfer involves criminal property this can put a firm at risk of an arrangement offence.”
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