Money laundering: New rules should not distract from AML compliance
The new statutory duty on lawyers to promote the “prevention and detection of economic crime” must not trigger an “over-zealous” response by the Solicitors Regulation Authority (SRA), the Law Society has warned.
It predicted that small law firms, which may be “predominantly composed of Black, Asian and minority ethnic background solicitors”, could be hit hardest by the requirements.
The warning came in the Law Society’s response to a Legal Services Board (LSB) consultation on draft statutory guidance to help the frontline regulators understand how to meet their new duty, which was added to the overarching regulatory objectives of the Legal Services Act 2007 by the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
The consultation set four draft outcomes for the regulators: they need to understand and act to address risks that may lead to those they regulate “knowingly or unknowingly facilitating economic crime”; ensure lawyers understand how to identify and avoid economic crime risks; monitor compliance; and “regularly” evaluate their standards and procedures.
The society argued that regulators already have sufficient powers to monitor compliance and in recent years had taken “an increasingly proactive approach” to fining firms that did not comply with their anti-money laundering (AML) obligations.
“Many smaller firms are already struggling with the burden of ever-increasing AML and sanctions requirements.”
The response argued that, “given the lack of evidence that other economic crimes pose a realistic threat to law firms”, the society was “concerned that regulators may interpret this as requiring them to introduce new standards or regulatory requirements”.
The SRA had already been “over prescriptive” in requiring unnecessary third-party screening and source of funds checks – in both cases measures were introduced despite there being “no requirement in law, or evidence of these being necessary” to ensure sanctions compliance.
“We are concerned that the SRA will take a tick-box mentality and gold-plate its expectations in a way that is disproportionate to the actual risk and discourages firms from taking appropriate risk-based approaches.”
The society also said the over-representation in enforcement processes of Black, Asian and minority ethnic solicitors in disciplinary processes would “be exacerbated further if the SRA demonstrated an “over-zealous approach to enforcement with potentially onerous requirements” which smaller firms were less equipped to deal with.
The response said that, beyond the potential threat of money laundering and the role that the legal sector played in the sanctions regime, there was “little evidence” to suggest that other areas of economic crime as defined in ECCTA were a “substantive risk”, and “little justification” for new compliance requirements which could “distract from the current focus and resourcing” on AML and sanctions compliance.
Nowhere in the regulatory objective were regulators asked to “enforce” existing rules or requirements or “implement” new ones, it went on.
Richard Atkinson, president of the Law Society, commented: “Caution is required, particularly given the broad definition of economic crime under the Act, which risks distracting regulators from their current focus with regards to anti-money laundering and sanctions compliance.”
There was “no justification for the introduction of new compliance requirements by regulators beyond the intention” of ECCTA.
“It is essential that regulators engage with communities and practitioners to draft effective guidance and provide education and raise awareness on wider economic crime risks faced by the legal profession.”
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