The Solicitors Regulation Authority (SRA) has recently announced that it is working with the National Crime Agency (NCA) and the Home Office to ensure that law firms have robust systems in place to avoid money laundering. The SRA, along with other regulators in the UK, is undertaking a thematic review of Anti-Money Laundering (AML) policies and procedures, and have recently published a paper (“Cleaning up” ) which aims to offer advice to law firms and particularly their Money Laundering Reporting Officers (MLRO).
This move comes as no surprise to many who are familiar with the political aspects to these reviews. The Financial Action Task Force (FATF) (the body that oversees recommendation for combating money laundering internationally) is due to send evaluation teams to review the UK next year. As a result, Government agencies and regulators alike are on alert endeavouring to ensure that when the FATF teams turn up there are no 'skeletons in the cupboard'.
More interesting to note is the NCA's role in this review. The number of Suspicious Activity Reports (SARs) from the legal sector in the UK has fallen from 15,000 in 2008 to just 4,000 last year, a massive drop of 73%, whilst the overall number of SARs has risen from 225,000 to 315,000 in the same period - a rise of 40%.
It's the mismatch in these statistics which has alerted the NCA & SRA that there appears to be a significant problem across the legal profession in terms of its anti-money laundering.
To compound matters, notwithstanding the small number of notifications from law firms, comparatively, more SARs are sent back to the legal sector than any other professional sector because inadequate information has been provided. The situation has led the NCA to announce that they will be rejecting any consent orders from the legal profession that do not contain all the information they require.
Having been in the AML industry for the last 10 years and seen the many changes over that time, we believe that many MLRO's and legal firms struggle with the 'Risk Based Approach' to AML.
How we all feel about risk is different. MLROs in different firms, even those with very similar client and work types, may adopt widely differing policies and procedures. While there is no doubt that a number of firms already take a 'belt and braces' approach, many others still appear to be 'going through the motions', leaving themselves open to regulatory (and potentially criminal) sanctions.
In the run-up to the SRA investigations into the adequacy of firms AML systems, it is an ideal time to review your procedures. Nor is it simply about building an AML 'fortress', which is likely to cost a firm far too much in time, money and effort while making it unnecessarily difficult for clients to do business with you.
Many legal firms adopted their working practices, policies and procedures back in 2004, and the world has moved on in terms of technology in the last 10 years. Know Your Customer (KYC) and Customer Due Diligence are at the very start of this process and if firms get this right they can better protect themselves further down the line, time and cost-efficiently.
Firms can avail themselves of a range of sophisticated tools, such as SmartSearch, which allow law firms to undertake KYC checks for Individuals and any type of corporate clients both in the UK and Internationally in a matter of seconds or minutes. They can also incorporate screening of sanctions and Politically Exposed Persons, with all of a firm's clients being monitored on a daily basis.
Lockton will be producing a series of reports on AML matters, designed to help you manage your AML compliance effectively. Look out for these over the course of 2015.
Martin Cheek is Managing Director of Smart-Search, providers of online AML solutions to many UK law firms.