Money laundering: Disagreement over basis of levy
Small law firms should not be exempt from the economic crime levy the government wants to introduce to help tackle money laundering, the Solicitors Regulation Authority (SRA) has said.
The SRA also disagreed with the Law Society that the new levy, which will be paid by all businesses subject to the Money Laundering Regulations, should be based on the number of suspicious activity reports (SARs) they make and not on revenue.
The Treasury consultation issued in July suggested the levy could consist of three separate elements: a levy based on revenue – potentially £100-200 per £1m of turnover – a small business exemption and, if possible, a money laundering risk weighting.
Though the consultation closed in October, the SRA has only just published its response.
The SRA said that, due to their “more limited resources”, small firms could be “vulnerable to attempts to use their services to launder money and finance terrorism, not least because money launderers may target firms that they perceive to have less sophisticated controls”.
The regulator went on: “Firms may have a number of factors that contribute to their risk regardless of their size, for example clients from high-risk jurisdictions, offering services in high-risk areas or not meeting clients face-to-face will all increase risk.
“The risk that small firms pose should be reflected in their contribution to the economic crime levy. For these reasons we do not believe that small firms should be exempt from paying the levy.”
The regulator made clear that it did not share the view of the Law Society, which is strongly opposed to the levy, that it should be based on SARs and not revenue.
The Law Society said basing the levy on income would be “especially harmful to the profession”, as revenue did not equate to risk, whereas using the number of SARs from the previous year “would be simple, cheaper and fairer”.
The SRA countered: “We believe the use of SARs not only risks creating a financial disincentive to report suspicious activity, but also is not a good identifier of high-risk firms.
“Firms that submit more SARs may be doing so in part due to the effectiveness of their internal controls and systems, rather than due to being particularly risky.
“The fact that a firm has submitted zero SARs may suggest that they have ineffective controls or even that they are purposefully underestimating risks and not reporting suspicions they may have.”
The SRA said that, “given the absence of alternative and readily available factors that would reflect firm risk in an accurate and comparable way, we generally agree with the proposal for the use of UK revenue as the core metric for calculating the levy”.
However, the SRA warned that basing the levy “only on revenue” would limit how proportionate it could be.
“Many of the largest firms will have the resources and expertise to more effectively guard themselves against money laundering risk, whereas smaller firms may be more exposed and present an easier prospect for criminals seeking to abuse their services.”
The regulator argued that it should not collect the new levy, and the task should be carried out instead by a centralised agency.
The SRA said this would “avoid the need for multiple organisations including ourselves to take on a new and untested duty (i.e. tax collection) with little understanding of whether our systems are suited to it”.
If money laundering supervisors such as the SRA were to collect the new levy, they would need a “clear legal duty” to carry it out and “enforcement tools” to help them complete the task.
The SRA said that while it had a “close relationship” with the firms it regulated, its powers were not designed to enforce compliance with collection of the levy.
“A single agency, with clear powers set out in statute, could be more effective in enforcing their decisions against law firms on the narrow basis of levy collection than we would, unless legislative change extended our powers.”
However, the SRA said it would be prepared to report firm turnover and other supporting information to this agency.
The regulator added that, although charging on the basis of revenue was the “best available option at this point in time”, in the future the government should work towards a levy which took risk into account.
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