Money laundering:
Solicitors facing disciplinary action
The Solicitors Regulation Authority (SRA) has referred 26 law firms offering trust and company services to its disciplinary team after a review revealed that a “significant minority” of practices were failing to do enough to tackle money laundering.
The SRA said that following its thematic review, it would write to a further 400 asking them to show they comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
The regulator has issued a warning notice highlighting its concerns, particularly on risk assessments, and set up a new anti-money laundering (AML) team with increased resources.
This is against a background of having 160 live investigations into law firms linked to money laundering issues.
The regulator said the creation and administration of trusts and companies had been highlighted by the government as one of the legal service areas “at highest risk of exploitation by criminals to launder money”.
Its thematic review of trust and company service provider (TCSP) work involved 59 law firms, and found that most were “adequately meeting their obligations to tackle money laundering”.
“Yet a significant minority are not doing enough, with some falling seriously short.”
While the SRA found no evidence of actual money laundering, it said breaches of the 2017 regulations and poor training or processes could mean firms were “unwittingly assisting money launderers”.
It said a firm-wide risk assessment was required by law and should be “the backbone” of a firm’s AML approach.
“We found that too many firms’ approach was inadequate. More than a third of firms’ (24) assessments did not cover areas required in legislation, this included a small number (four out of the 59 firms we visited) that had no risk assessment at all…
“For the avoidance of doubt, failure to have a money laundering risk assessment in place for your firm is a significant breach of the money laundering regulations and potentially serious misconduct. Where we see misconduct, we will take robust enforcement action.”
Thirty-nine of the 59 firms specifically covered TCSP work in their risk assessment.
The review also looked at file risk assessments and found that 76% of fee-earners interviewed were able to provide “a satisfactory response” about risk assessments for each of their TCSP files.
“This suggests that some firms have adopted a system to help mitigate AML risks. We did however refer 14 firms for further investigation.”
Other findings included:
- Almost a quarter of the firms had inadequate processes to manage the risks of politically exposed persons (three firms did not even know what this was);
- Twenty one file reviews showed evidence of failings on customer due diligence;
- Forty-nine firms had a process in place when dealing with clients they had not met, while 10 refused to act for people they had not personally met; and
- Fifteen files did not feature adequate enquiries about the source of wealth, while 14 did not feature adequate enquiries about the source of funds.
Only 10 of the 59 firms had submitted suspicious activity reports in the last two years.
“This tallies with concerns raised by the National Crime Agency that generally law firms are not being proactive enough in looking to identify and then report suspicious activity,” the review said.
However, the regulator said 15 firms had turned down client instructions for reasons including “clients being evasive”.
It added: “Most firms provided specific training about trust and company work and beneficial ownership. Poor training leads to poor compliance.
“Seven firms did not provide training on these topics and we have referred five of these into our disciplinary processes for breaches of the MLR 2017.”
Eight referrals for disciplinary action concerned inadequate AML policies.
The SRA said it would be “keen to see evidence” that the 26 firms referred to the disciplinary team were “moving swiftly” to comply with their obligations or face “strong action”.
Paul Philip, chief executive of the SRA, said: “The stakes are too high for solicitors to be anything but fully committed to preventing money laundering and the crime its supports.
“Most solicitors take their responsibilities seriously, but too many firms are falling short. Those firms should be on notice that compliance is not optional. They need to improve swiftly.”
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