Money laundering has a devastating impact on society. Funding organised crime in the illegal trade of drugs, guns and people, money laundering is estimated to cost the UK £37bn each year[1], though some estimates make it £100bn*[2]. The burden of preventing money laundering falls on a number of different sectors, from banking and finance, through to legal, who all might be unwitting accomplices to money laundering.
Should an unsuspecting solicitor be found to have aided in money laundering, the personal consequences can be dire. Aside from the reputational damage this would bring to a lawyer and their firm, they face being struck off the roll and even time in prison, with the maximum sentence being 14 years.
Given the severity of the consequences, it’s important for everyone in a law firm carrying out regulated work to understand the rules and their obligations.
What is anti-money laundering?
Anti-money laundering (AML) refers to the actions and processes taken in the fight against money laundering. Businesses need extensive AML processes to protect themselves from becoming unwitting accomplices to money launderers.
Money laundering is the process of turning illicit funds gained from criminal activity into ‘clean’, legitimate funds that can be used with little to no risk of that money’s origins being traced back to its criminal roots.
The legal sector is at particular risk from money laundering, with the Home Office’s 2020 National Risk Assessment[3] pointing out particular high risk for conveyancing firms and trust and company service providers (TCSPs).
The methods being used by criminals when undergoing the money laundering process are becoming ever more sophisticated and complex, and therefore difficult to trace. This makes life incredibly difficult for solicitors, who, while not expected to be forensic investigators, still need to be able to spot red flags, investigate and report any suspicions they may have.
For a more detailed look at AML – the methods being used and red flags to look for – download The Access Legal AML Guide for Law Firms, written by Access Legal’s Regulatory Director Brian Rogers.
Legal AML requirements for law firms
As mentioned, conveyancers and TCSPs are at the highest risk of money laundering activity, but money laundering regulations apply to all law firms that handle client money or have a client account.
A recent development in money laundering methods[4] means civil litigation firms and departments should also be mindful of their money laundering risk. This is because criminals take to sham litigation as a means to transfer illegal funds in a seemingly legitimate transaction.
Due to the high risk to law firms, Money Laundering Regulations place on them a number of requirements:
1. Conduct a practice-wide risk assessment (PWRA)
Perhaps the most important of all a law firm’s money laundering requirements is the PWRA as all other money laundering risk mitigation carried out by the firm should be informed by the PWRA.
The PWRA needs to be comprehensive, covering the five mandatory risk factors:
- Product and service risk
- Client risk
- Transaction risk
- Delivery channel risk
- Geographic risk
The risk factors are assessed at an industry level by the SRA, which needs to be taken into account when assessing how these risks affect your own firm.
The PWRA shouldn’t be a one-time event, but is a living, breathing document that should be regularly updated as new risks present themselves.
2. Implement a comprehensive set of policies, controls and procedures (PCPs)
After completing your PWRA, you should have a clear idea of the money laundering risks your firm will face. You then need to determine how you will mitigate those risks and detail these in a comprehensive set of policies and procedures.
These policies need to cover all of the risks your firm will face and how you will mitigate them in detail. These also need to be readily and easily available to all of your firm’s employees.
You’ll also need to appoint a Money Laundering Reporting Officer (MLRO) who will have overall responsibility for your firm’s AML compliance and will need to ensure policies are being followed and that regulatory obligations are being met, reporting any suspicions to the National Crime Agency (NCA).
A firm should also appoint a Money Laundering Compliance Officer (MLCO) where appropriate to the nature and size of the business. The reality is that most regulated firms will need to appoint a MLCO unless they are a sole practitioner, in which case, they will hold the role of MLRO anyway.
The MLCO should be a member of the board and have the authority to be able to support the MLRO at the board level in providing adequate resource and influence to ensure compliance with money laundering regulations.
3. Implement effective AML training for relevant staff
Your people are your best defence against money laundering as they’ll be the ones best placed to spot red flags and act on them. But to be able to spot those red flags and know what to do afterwards, they need the appropriate AML training.
The Money Laundering Regulations provide that firms must ensure that ‘relevant people’ have AML training relevant to their role[5]. A relevant person is essentially anyone in your firm who might be in a position to identify money laundering in your firm, so will apply to most of your employees, excluding non-legal staff, such as cleaners.
We provide dedicated AML eLearning courses for law firms to upskill their teams on anti-money laundering obligations.
4. Complete adequate client due diligence (CDD)
Client due diligence (CDD) essentially means verifying that what your client is telling you is true. You’ll need to take a risk-based approach to this. On each and every client and matter, you’ll need to conduct a risk assessment, which will dictate the level of due diligence that will need to be applied.
When conducting CDD, you’ll need to verify your client’s identity, investigating whether they are a politically exposed person (PEP) or linked to any high-risk third countries. You’ll also need to verify the clients’ source of wealth and source of funds.
Source of wealth refers to how the client makes their living and how they have accumulated their wealth. Source of funds refers to the money being used for that particular transaction.
Where the client is a company, you’ll also need to identify and verify all beneficial owners.
You can get more detail on what due diligence measures should be taken and when to use enhanced due diligence in the Access Legal AML Guide for Law Firms.
5. Report your suspicions
Where a fee earner has any suspicions that a client may be involved in money laundering, they must report those suspicions to the MLRO. The MLRO must then decide whether to report those suspicions to the
These reports take the form of a Suspicious Activity Report (SAR), which should be submitted through the NCA’s online portal. These reports have to be fully justified and explained as any unwarranted reports where the firm is trying to be on the safe side may lead to rebuke by the NCA.
When submitting a report, you can request consent to continue working on the matter, known as a Defence Against Money Laundering (DAML), which frees you to continue working on a matter without fear of rebuke later on. In many cases, you won’t receive a reply from the NCA. In these cases, if no reply is received within two weeks, you can rely on a deemed defence against money laundering.
How to manage AML risk at your law firm
The best way to manage your money laundering risk is to follow the requirements in the Money Laundering Regulations. By conducting a PWRA, understanding your risks and how you’ll mitigate them, you’ll be in a great position to manage that risk.
You’ll also need to ensure that policies are followed, training completed and CDD completed adequately and the best way to do that is through appropriate monitoring.
Many firms monitor performance via file audits as a method of quality control to ensure that policies have been followed and a risk-based approach taken to CDD on matters.
The MLRO need to track the results of audits and report on this to your firm’s board of directors or partners. You can do this via spreadsheets, though this can be a difficult way of doing it. The easiest way is by using a dedicated compliance system that tracks all of your audits and other compliance data, giving access to reports at a moment’s notice, such as our legal compliance software.
At Access Legal we also provide a comprehensive AML solution that help you quickly and easily meet AML requirements for:
- AML training
- Comprehensive PCPs
- Monitoring and control
- Client due diligence, including biometric ID verification and source of funds reporting
- Advice on complying with AML regulations
Download our free brochure to find out how your firm can make AML compliance easy.
Anti-Money Laundering checks for solicitors and law firms
Money laundering compliance mustn’t be a tick box exercise but should be an integral part of your firm’s culture. The same goes for when completing client due diligence. There isn’t a set list of questions you need to ask, and you’ll need to take a risk-based approach, assessing the level of risk presented by a client or matter and what measures you’ll need to take.
Some points you might want to consider in this respect are:
- Does the client’s story make sense?
- Would you expect a person in their circumstances to be carrying out this transaction?
- Would they have access to these funds?
- Is the client a politically exposed person?
- Is the client from a high risk third-country?
- Have there been any issues with the client’s ID documents?
- Is the transaction particularly large or complex?
- Does the transaction have an apparent legal or economic purpose?
Asking these questions should give you a good idea of whether a client will be high risk and the level of detail you’ll need to go into when performing due diligence.
Our AML solution includes AML checks that review a client’s details against 300 databases - including PEPs and sanctions lists, biometric ID verification and source of funds reporting. This means you can complete these important AML checks in a matter of minutes.
