In June 2017, the new Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) came into effect. They require more effort to combat money laundering and terrorist financing on the part of law firms and other ‘relevant persons’ – in particular to carry out thorough Customer Due Diligence (CDD), including a search for adverse information on prospective and existing clients. Barrister Jane Jee explains the impact the new regulations will have on the legal sector:
Lawyers will have to take the law more seriously!
It seems that when it comes to a choice between accepting a new client and the obligation to carry out thorough CDD checks, too many lawyers put profit before compliance. However, that may be more difficult going forward for various reasons:
The government has long been unhappy with inconsistency in the way the legal profession is supervised for Anti-Money Laundering (AML) purposes and is introducing a new supervisor of regulators, OPBAS, to ensure consistency of supervision and fewer loopholes
Pooled client accounts (PCAs) must be risk assessed and subject to CDD – not simplified due diligence (SDD), unless the account is proven to be at low risk of money laundering
Law firms are increasingly recognised as a relatively easy way to launder money. The Law Society has said: “Compliance with money laundering obligations is one of the greatest challenges for solicitors in the UK today”.
The 'beneficial owners, officers or managers' of law firms have a year to apply to the Solicitors Regulatory Authority (SRA) for approval, which must be granted unless they have been convicted of a relevant offence. Acting as a beneficial owner, officer or manager of a firm without approval after 26 June 2018 is a criminal offence (unless you have applied for approval and it has yet to be determined). Sole practitioners also need to apply for SRA approval.
In a recent report from risk management software firm, Accuity in collaboration with the Law Society, ‘The Challenges of AML for Law Firms 2016’ (published before the new regulations came into force), law firms considered their four greatest challenges to be CDD-related, namely verifying beneficial ownership, establishing a client’s source of wealth, performing ongoing due diligence and getting fee-earners to take responsibility for client CDD. The new regulations continue to stress that firms are not doing enough to meet their CDD obligations, despite the perceived challenges.
The complex nature of regulation of the legal sector
Under the MLRs, theoretically each regulator of lawyers including the Law Society - the regulator with the largest remit covering both law firms and independent legal professionals - has to publish guidance on the MLRs. However, the Law Society’s website, as of 23rd June 2017, says:
The Law Society's Money Laundering Task Force is working with representatives from across the legal sector to update [this practice note] to take into account the changes that will be brought about by the MLRs. The government's decision that there is to be only one HM Treasury-approved piece of AML guidance per sector going forward has meant the sign-off process now requires the agreement of 11 legal sector regulatory and representative bodies across the UK. While we had hoped to have had the guidance approved and published ahead of the commencement of the new MLRs this has unfortunately not been possible.”
One might have expected that the legal sector would be able to navigate its way through the complexities of AML laws more easily than most. Surprisingly, educating staff about reporting compliance and AML breaches has proved challenging for many law firms.
PCAs under more scrutiny
The Treasury’s latest National Risk Assessment in 2015 highlighted that law enforcement agencies in the UK had seen cases where PCAs had been used to provide personal banking facilities to criminals, to move and store large sums of criminal proceeds and to obscure the audit trail of criminal funds. If a law firm’s accounts department has to ask around the firm about monies received from third parties who are not known clients, this should raise eyebrows and lead to better on-boarding practices. The practice of accepting funds from third parties has obvious money laundering risks. Payments on account may also come under scrutiny.
Law Society rules applicable to accounts opened by law firms and operated as client accounts state:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
Given that there was no national consensus that PCAs always present a low risk of money laundering, the government view is that PCAs should not be automatically subject to SDD, but rather a risk-based approach. The government has therefore included PCAs in the MLRs on that basis, underlining the focus on a firm’s risk-based approach.
An increase in enforcement action?
In a case brought by the Solicitors Regulation Authority (SRA), the partners of Clyde and Co solicitors admitted they allowed a client account to be used as a banking facility, acting against SRA accounting rules and in breach of existing obligations under the then-current money laundering regulations (2007).
Clyde was fined £50,000 and corporate partners Christopher Duffy, Simon Gamblin and projects partner Nick Purnell each received fines of £10,000. The fine was handed down following a hearing before the Solicitors Disciplinary Tribunal on 21 March 2017.
With the increased focus on AML enshrined by the new regulations, and the upcoming Financial Action Task Force’s Evaluation of the UK's AML and counter-terrorist financing frameworks in 2018, the regulators will be keen to take a firm hand to lawyers who fail to comply with their AML obligations.
Conclusion
Whilst all ‘relevant persons’ are impacted by the MLRs and need increased documentation on risk assessment and CDD processes, the legal sector should be leading the way on implementing and upholding AML regulation. Law firms now have an excellent opportunity to adopt ‘best practice’ within their sector and demonstrate thought leadership and integrity to all market sectors affected by the MLRs.
The new legislation will potentially slow new business and could be costly. Law firms should take the need to search for adverse information on prospective and existing clients seriously, but unless technology is harnessed to help gather information to assess the risk posed, the cost of compliance will be high. This is where emerging regulation technology can assist.
Jane Jee
CEO
www.kompli-global.com
On Twitter: @kompliglobal
On LinkedIn: linkedin.com/company/kompli-global
Jane Jee is the CEO of RegTech firm, Kompli-Global. Jane passionately believes that good compliance makes good business sense because companies who gather data on customers can often sell to them more effectively. After qualifying as a barrister, Jane gained broad experience in card-based, e-money, internet and mobile payments, having worked in commercial (marketing) and legal roles in the sector for over 20 years. She was Managing Director at Access, the credit card issuing and acquiring organisation, and later became Divisional Manager at Mondex International where she became familiar with e-money regulation. Jane is now focused on delivering Kompli-Global’s unique Compliance Service which fully meets the regulatory requirements and enables clients to take on new business and retain it, confident that they have access to the best available information and expertise to fulfil their compliance obligations.
Kompli-IQ™ - is a multi-lingual, licensed software as a service (SaaS) search platform. Using proprietary machine learning technology and natural language processing, Kompli-IQTM interrogates a wide variety of global data sources on the web for published adverse information on individuals and entities. This makes due diligence fast, simple, consistent and affordable for any business with Know Your Customer (KYC) and Anti-Money Laundering (AML) obligations.
The gold standard in due diligence reports:
Customer Due Diligence (CDD) reports - The result of thorough interrogations performed against a comprehensive range of public domain information sources (recognising that a single source isn’t sufficient), employing human investigatory abilities to deliver a written CDD report on a target subject in any language.Enhanced Due Diligence (EDD) reports - Specialist investigation delivers a highly detailed and customised Enhanced Due Diligence (EDD) report with reference to clients’ requirements and direction, and specific focus on red flags identified at the CDD level.
