Cannabis: Emerging risk
Firms getting into new areas of work because of the financial impact of Covid, along with handling funds generated through the legal sale of cannabis abroad, are among emerging money laundering risks, the Solicitors Regulation Authority (SRA) has warned.
It also identified large firms putting risk-based information in compliance silos, and practices being over-reliant on external support, as potential problems.
In December, the government published the National Risk Assessment of Money Laundering and Terrorist Financing 2020, which ranked the overall risk of money laundering involving lawyers as high.
The SRA has followed this up with a dedicated sectoral risk assessment looking at the specific risks and challenges within legal services.
Highlighting emerging risks, the SRA said the economic problems caused by the pandemic have “potentially left some firms in a vulnerable position, where they might be more likely to become involved in business areas and relationships they would otherwise have avoided”.
It continued: “Criminals know this is happening and will be looking to exploit those firms where tolerance to risk has increased.”
Covid has also accelerated the trend for firms not meeting clients face-to-face and using electronic identification and verification tools instead.
The SRA said: “While they can be valuable in aiding firms to fulfil their AML duties, they might however present risks where they are not fully understood, they are being used in a way that they are not intended for and those using them are not properly trained in the systems leading to user error.”
There were similar risks in the use of new types of financial technology, such as fund-transfer systems and crowdfunding platforms.
With the partial or total decriminalisation of cannabis in some countries, and its increased use in therapeutic settings, “how firms handle funds generated through the sale of cannabis has become a greater issue in recent years”, the SRA said.
“This has made it more challenging to draw the boundary between legal and illegal revenue in the UK.
“This issue extends to revenue from foreign cannabis businesses (for example in Canada) that while locally legitimate, might technically be the proceeds of crime in the UK according to the definitions in the Proceeds of Crime Act 2002.
“Any firms involved in the legitimate cannabis industry need to be fully aware of the legal risks prevalent in this area and the specific restrictions that might be present in the matters they act on.”
There is a small but growing niche of law firms looking to act for the legal cannabis industry.
Other issues highlighted by the assessment included “weak screening controls, open up firms to the risk of infiltration by organised crime gangs” – these could related to source of funds checks, independent audits, screening of staff and matter risk assessments.
“We have also seen that while larger firms might have greater resources to protect them from money laundering risks, they will often silo off risk-based information in a compliance team or system.
“This can mean that those working on a file might: lack ready access to the underlying risk assessment and due diligence documentation and information, and/or be prevented from conducting effective ongoing monitoring of risk.”
Equally firms can also “over-rely on external help in order to meet their compliance requirements”.
This caused problems such as unsuitable use of templates for risk assessments, using electronic identification and verification systems without understanding their limitations, and using external consultants to draft their compliance documents without an in-depth understanding of the work of the firm.
“While seeking external help with your compliance can be of benefit, the firm is in the best position to understand its own risks and design and implement effective mitigations.”
The regulator said smaller firms in particular could take an “overly simplistic approach” to risks associated with politically exposed people and higher-risk jurisdictions.
“The UK economy is highly integrated with the rest of the world, and services offered in the UK are attractive to those in high-risk jurisdictions who wish to make the proceeds of crime seem legitimate.
“Simply stating that your firm does not deal with clients like this is not a sufficient protection against the risks they present.
“It is also important to note that PEPs might also be from the UK, and indeed there are many thousands of PEPs in the UK, who may seek legal services for entirely legitimate reasons.”
The SRA said firms should use its assessment as a basis for creating their own firm-wide risk assessments, against which anti-money laundering policies, processes and training should be implemented.
All firms have a legal obligation to have a firm-wide risk assessment, and last year the SRA required those within the scope of the regulations make a declaration that one was in place.
Last month, the Legal Sector Affinity Group, made up of all the UK’s legal regulatory and representative bodies, published a major update of its definitive guidance to AML.
Later this month, Legal Futures will release a webinar dedicated to understanding the new guidance. We are also running a webinar on the impact of the guidance on property lawyers.
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