Though the MLCO compliance role is significant, with robust policies and procedures which are kept consistently fit for purpose, the risks to the firm should be kept to a minimal.
However, a recent regulatory agreement and penalty should be taken as a rebuke to those parts of the profession who are still neglecting their anti-money laundering (AML) compliance duties. According to the SRA’s latest AML report, inadequate risk assessments were one of the common compliance issues it identified.
And bearing in mind that the consequences of AML breaches are now potentially more costly, firms should be increasingly diligent. Last summer, the SRA’s fining powers for law firms (but not ABSs) increased substantially from £2,000 to up to £25,000.
Extensive AML breaches
Under an agreed settlement with the SRA, Oxford firm Ferguson Bricknell paid out a £20,000 fine (which was towards the upper end of the scale) and costs of £1,350. The firm had shown disregard for its most basic of statutory duties and obligations and made several admissions that its breaches of AML legislation breached the SRA principles and code of conduct.
Firms could take the lengthy list of the firm’s breaches of the Money Laundering, Terrorist Financing (Information on the Payer) Regulations 2017 (MLRs 2017) as a checklist of what not to do. Note that this was a very small firm, but the SRA said its conduct had the potential to cause harm, by facilitating dubious transactions that could have led to money laundering and/or terrorist financing.
The SRA findings against the firm included:
- No compliant AML firm-wide risk assessment of AML policies, controls and procedures (PCPs) were implemented until after the SRA’s onsite investigation was complete
- The firm’s declaration to the SRA that its firm-wide risk assessment was compliant with Regulation 18 and in line with relevant guidance was incorrect - it was not compliant
- A policy given to the SRA as the start of its investigation was undated and anonymous, referred to outdated legislation and had not been regularly updated.
- There was no assessment (within the firm-wide risk assessment) of the risks associated with conveyancing and controlling client money (areas of work accounting for around 75% of the firm’s fee income)
- Important guidance, such as the Legal Sector Affinity Group guidance and the SRA’s Sectoral Risk Assessment, was not taken into account properly
- The firm failed to have sufficient regard for the SRA warning notice on Money Laundering and Terrorist Financing, nor did it identify warning signs (unexplained third party payments, for instance)
- It had no independent audit function as required, given the size and nature of its practice and work. This meant it had failed to examine and evaluate the adequacy and effectiveness of its policies, controls and procedures
- There were significant failings in AML training practices: one of the partners and the relevant employees had no specific training on the MLRs 2017 and no training records were maintained. The only training given was in the form of the (outdated) Anti-Money Laundering Booklet
- Sample client files revealed various breaches, including weak or non-existent ongoing monitoring of transactions and failings in the appropriate checking of sources of funds. Conveyancing ‘red flags’ were missed (including receiving monies from third parties).
- Reviewed files also showed no client or matter risk assessments were undertaken – the SRA described this as a “considerable failing”
- A failure to keep proper records to satisfy customer due diligence
The £20,000 fine imposed on the firm reflected both the substantial aggravating circumstances, and an absence of mitigating factors.
The simple and straightforward takeaway is: compliance with your AML obligations is critical, otherwise you risk a regulatory investigation and penalties.
Compliance can undeniably be a challenging process, particularly if your firm is larger and your practice involves conveyancing and other specific regulated activities. Even so, there is a raft of tools, guidance and advice available that firms have no excuse not to be familiar with.
Useful links can be found here https://www.lawsociety.org.uk/topics/anti-money-laundering/anti-money-laundering-guidance
If you'd like to learn more about this topic, our 2023 SRA 4-hour webinar bundle is available to pre-order here.