Posted by Ben Mills, commercial director of Legal Futures Associate Minerva
Mills: Confusion about the difference between source of funds and of wealth
The UK is a high-risk jurisdiction for money laundering. Law firms – and especially conveyancers – are attractive to criminals due to the type of work they do; according to the National Risk Assessment of Money Laundering and Terrorist Financing 2020, hundreds of millions are laundered through conveyancing across the UK.
Tackling financial crime places a considerable burden of risk and compliance on conveyancers. But, while this onus can be frustrating, the need to combat the issues related to money laundering – including people trafficking, drugs and organised crime – cannot be overstated.
The Fifth Money Laundering Directive was introduced to crack down on illicit and terrorist financing, with firms required to implement a risk-based approach to identifying, assessing, understanding and mitigating money laundering threats.
Nevertheless, the number of fines handed out by the Solicitors Regulation Authority (SRA) has increased six-fold over the past five years: in 2021/2022, the SRA handed out 37 fines, compared to just six in 2017/2018.
While this increase is partly due to an anti-money laundering compliance crackdown, the National Crime Agency has identified lawyers as ‘professional enablers’. Firms have to do more if the UK stands any hope of stopping property from being used to clean dirty money.
Tackling this issue head-on, the 2022 Risk Agenda published by the Council for Licensed Conveyancers (CLC) highlights two big problems with source of funds (SoF) and source of wealth (SoW) compliance.
Firstly, when inspected, 45% of CLC firms did not demonstrate that adequate SoF and SoW enquiries were undertaken.
Secondly, there was confusion about the difference between SoF and SoW, with inspectors finding “different interpretations of what practices have to do and the evidence they need to obtain to ensure they are complying with their duty to check the source of a client’s funds and wealth”.
In very simple terms, and to help those on the frontline, SoF refers to money used to fund a specific transaction. For example, where did the money come from, and how and from where did the client get it (over and above coming from a UK bank account)? On the other hand, SoW relates to the source of a client’s total wealth/assets. SoW covers how an individual or company has the money it has.
On 20 July 2022, the maximum fine the SRA can impose on firms increased to £25,000. So, to ensure they do not fall foul of their AML obligations and to avoid hefty fines, firms may need to up their game.
A critical step forward is for firms to implement a risk-based approach to identifying, assessing, understanding and mitigating money laundering threats. To make accurate risk-based decisions, firms must show that they have the data, answers, rationale and evidence on every purchase file. And, because every transaction is different, an audit trail is critical when explaining why a firm has assessed something at a certain level of risk.
One of the easiest ways to do this is to invest in an intelligent digital solution that allows clients to supply the necessary information, which will assess the authenticity of this evidence, and which will provide a complete overview of a client’s SoF and SoW in a way that a solicitor can adequately evaluate.
Firms also need to ensure robust training is in place to ensure that solicitors know how to spot red flags and make solid evidence-based conclusions.
Tackling money laundering is essential. Not only because there are severe consequences for firms that fail to meet their obligations, but also because money laundering can inflict enormous damage on broader society.
Moreover, as well as ensuring compliance peace of mind, by making fund checks part-and-parcel of the client onboarding and engagement experience, firms can make the whole process more manageable, and in turn, create happier clients.
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