Anti-money laundering: Source of funds checks no being done
More than 10% of law firms whose compliance with anti-money laundering (AML) rules was checked by the Solicitors Regulation Authority (SRA) in the last year have been referred for investigation, it has emerged.
Bounce-back loan frauds and criminals infiltrating law firms are among the emerging trends firms should be aware of, according to Colette Best, the SRA’s director of AML.
Speaking at this week’s Law Society AML and financial crime conference, she said eight of 69 firms visited virtually by the SRA in the year to April 2021 were not compliant with the AML regulations and referred for investigation.
Only 16 were fully compliant and the rest partially compliant. Most received a letter of guidance or a stronger letter of engagement – the latter highlighting where particular changes were needed – with 15 firms signing up to a compliance plan.
The SRA follows up to ensure that the changes required under such plans are made. In-person visits have restarted this month.
The regulator also conducted 168 desk-based reviews in the year – 98 just looked at the firm-wide risk assessments, while the rest were more comprehensive.
Again, the majority were partially compliant, but 19 were referred for investigation.
In all, the SRA’s AML team is currently dealing with 200 investigations, which Ms Best said ranged from straightforward non-cooperation by firms “right up to really complex investigations relating to international frauds or terrorist financing”.
Property transactions were the most common cause of investigations, while some of the factors that contributed to the need for enforcement action were not training or supervising fee-earners, having inadequate policies, procedures and controls (PPCs), or individuals not following them.
Source of funds “came up quite a bit” in the visits. Out of 241 files reviewed by the regulator, 103 did not contain appropriate source of funds checks. Nearly a quarter of firms did not have a source of funds policy.
Ms Best stressed the importance of having a good firm-wide risk assessment and appropriate matter risk assessments.
Good practice observed included firms that undertook the check “really early in the transaction”, such as in the client-care letter, she reported.
Poor practices, by contrast, saw firms obtain the records but then file them without reading, and making assumptions about a client’s general wealth “but not asking where the funds for this specific transaction are coming from”.
Some firm-wide risk assessments were not kept up-to-date or omitted aspects, notably transactional risk.
The main problem with matter risk assessments was firms either not doing them or not rating the risk – identified at a third of visited firms. There was also a “mixed picture” on ongoing risk monitoring, Ms Best said.
When it came to PPCs, 55% of policies needed some changes, usually because they had not been updated, for example of take account of the 2019 amendment regulations.
Omissions noted included controls on preventing transactions which may favour anonymity and information about high-risk third countries.
Around a third of firms had good PPCs but they were not being implemented.
Ms Best identified four emerging risks: conveyancing and dubious investment schemes – “vendor fraud is the big one we’ve seen in the last year” – bounce-back loans being used fraudulently, evading currency controls through shadow banking, and “infiltration” by criminals placing people in law firms. This highlighted the importance of screening employees, she said.
But despite the gloomy picture painted by the statistics, Ms Best emphasised that “the vast majority of firms are really trying to do the right thing”.
She continued: “They’re taking a quite thoughtful, considered approach to this. It is a really challenging area, particularly at the moment with lots of firms transitioning back to the office and wave after wave of regulations changing.”
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