Only a fifth of law firms fully compliant with AML rules


AML: Quarter of files did not have required source of funds information

Only 22% of law firms checked by the Solicitors Regulation Authority (SRA) for their approach to anti-money laundering in the past year were fully compliant with the rules.

The regulator’s annual AML report too showed that nearly twice as many firms and individuals as last year faced enforcement action.

The three main factors behind non-compliance at those firms were senior executives not placing enough importance on having robust and compliant AML controls, inadequate supervision or training of fee-earners, and having systems and processes “that allow events to happen unchecked, such as receipt of funds or moving to the next stage in the transaction (rather than an automated ‘stop’ being put to a transaction when an element of customer due diligence has not been performed)”.

The detailed report covers the last fiscal year – as of 5 April 2024, 5,683 of the 9,308 firms authorised by the SRA fell within the scope of the AML regulations.

Of those, 512 received an inspection for AML compliance, a desk-based review or an inspection carried out as part of a wider investigation.

Only 110 firms (22%) were full compliant, with 284 (55%) partially compliant and 118 (23%) not compliant.

Partial compliance comprises both firms generally doing a good job but falling short in some areas, and those either not fully compliant in a number of areas or where the level of non-compliance in one area is significant.

The former receive a ‘letter of engagement’ that explains how to become fully compliant and the latter a compliance plan, setting out a series of actions they need to take, and by when, which the SRA monitors to ensure they are done.

Non-compliant firms, which are failing to meet core AML requirements, are referred to investigation.

The SRA said that 10% of the firm-wide risk assessments it analysed were not compliant, with some only putting one in place after it asked to see it, even though they had previously declared to the SRA in January 2020 that they did have one.

There was an improvement in client/matter risk assessments (CMRAs) – 19% of the 3,048 files examined during the year did not include one, while 12% were ineffective, for example because the rationale for allocating a particular risk rating to a client or matter was not clear.

In the previous year, 51% of CMRAs reviewed were ineffective. “We are pleased to note the improvement in this area,” the report said. The SRA issued a warning notice on CMRAs a year ago.

There was a high level of compliance with customer due diligence requirements, with 5% of files not containing evidence that the client had been identified and verified.

But the picture for source of funds checks was not so good, with 25% of files that needed them not containing the necessary evidence. “While several firms were able to provide an explanation of the enquiries they made, the files contained no audit trail to confirm the information provided.”

Large firms are expected to regularly carry out independent audits on their compliance and the SRA has started a three-year cyclical programme to review the outcomes of firms’ last independent audits.

It looked at 20 firms’ audits, finding all were properly independent, while 17 of the firms implemented the recommendations that were made. Three were referred for a desk-based review or inspection because the audits identified issues with some of their AML controls and/or the recommendations had not been addressed.

The SRA took enforcement action in 74 AML matters during the year, nearly double the previous year and far higher than any other year. It attributed the rise to having more investigation officers and a more streamlined case management process.

These matters led to 35 fines, 27 letters of advice, nine regulatory settlements involving fines, two warnings and one condition on a firm’s authorisation. The 44 fines totalled £557,000.

Only four cases reached the Solicitors Disciplinary Tribunal, half of the number in each of the past two years and less than a third of the previous three years – it said this was “partly” because of the SRA’s increased fining powers since summer 2023. Two of the prosecutions at the tribunal were unsuccessful.

The SRA submitted 23 suspicious activity reports to the National Crime Agency involving money laundering, similar to previous years, relating to funds amounting to over £75m. Almost three-quarters arose from conveyancing matters.

It also submitted two financial sanctions reports to Office of Financial Sanctions Implementation under the Russia sanctions regime relating to funds totalling over £369,000.

The regulator conducted a programme of proactive sanctions inspections during the year, focused on firms that previously declared that they had dealt with a designated person.

Of the 55 firms inspected, 40 were fully compliant, six partially compliant and nine non-compliant.

In September, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) – which overseeing legal and accountancy regulators’ AML, said it was not seeing “the consistent, effective improvement we need”, saying the regulators needed to strengthen their supervision.




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