According to a December 2020 HM Treasury and Home Office report, money laundering is a “fundamental threat to the country’s future security, resilience and prosperity”, costing the UK economy an estimated £37 billion per year. A significant finding in the report was the increased risk of money laundering, due to the high amount of capital that flows through the UK’s property market, and the relatively low levels of transparency historically associated with it.
The growth in overseas buyers and cash flowing into the UK property market was seen as significant because it often involved more complex ownership structures, some of which were headquartered in offshore jurisdictions. Having previously been considered at medium risk of money laundering, the property sector has now been added to the high-risk list, alongside financial services, and money service businesses.
A booming market
In the initial COVID-19 lockdown the property market suffered a huge blow, but this was swiftly followed by a steep increase when the stamp duty holiday was imposed. The BBC reported in June that housing prices were rising at the fastest rate for more than a decade, with many areas up 10 percent year on year. This appears to be driven partly by the cut in stamp duty but also by the societal changes the pandemic has caused. With working from home more of a norm and commuting less prevalent, people are choosing to spend more of their time and money in the home.
A risk for the legal profession
The increased focus on the property market, combined with the growth in demand for conveyancing, is a timely reminder to the industry of the growing scope of legislation related to the legal profession around AML (Anti money laundering) and KYC (Know Your Customer). The Solicitor’s Regulatory Authority (SRA) cites the important legislation that solicitors need to comply with in this area, namely the 2017 Money Laundering, Terrorist Financing and Transfer of Funds Regulations. This has twice been amended since; in January 2020 when significant amendments were made and then again later in 2020 as part of Britain’s exit from the European Union.
For those that provide legal services, the legislation relates to the following areas:
- buying and selling of property and businesses
- managing client money, securities or other assets
- opening or management of bank, savings or securities accounts
- organising contributions for the creation, operation or management of companies
- creating, operating or managing trusts, companies, foundations or similar structures
As discussed in this previous article here, this extensive legislation increases the risk of legal firms being in breach.
Complex compliance
Despite this, it is still not as simple as it should be to demonstrate effective compliance with AML legislation, particularly around source of funds information. Bearing in mind most information is now digitised and freely available for sharing, it is surprising how difficult it is to share simple information such as bank statements between solicitors and their clients simply and effectively.
A typical journey may be as follows: a solicitor requires either proof of funds or information on source of funds from a client. The request is made either via letter or email. A period elapses where the client gathers the information together and shares it, either as original or photocopied originals or via a CSV or similar digital file.
Already this is a slow and insecure process. The digital option (of downloading data and sharing in an Excel or similar) is open to manipulation meaning that it is very difficult for a solicitor to trust this process alone. Furthermore, the sharing of private financial information via email or similar can also expose security issues.
The paper option, while certainly more verifiable (at least via originals) is hardly practical. As all information gets digitised and online banking and apps become the mainstays of banking and finance, fewer people are storing, relying on or even receiving paper bank statements. Collating this information is also hugely time consuming.
Even when the information is available to solicitors, someone now needs to do a thorough investigation around the source of funds, potentially requesting further information or paperwork to support other evidence and prove the audit trail back to source. This process is further complicated by the fact that most people have more than one account. Financial Conduct Authority (FCA) data shows more than 70 million personal accounts in the UK and almost as many easy savings accounts. Solicitors may need access to multiple accounts to complete verification. Little wonder that the entire process is long winded and expensive.
The alternative is to provide access to online banking services to solicitors, but clients are naturally reluctant to do this, and it only exposes further risk if some future fraud or security breach is discovered.
Open Banking to the rescue
Fortunately, new alternatives are beginning to emerge that enable a smoother, simpler and more cost-effective way of sharing banking information and this is largely due to the UK’s Open Banking initiative.
Open Banking came into force in the UK in 2018. Its primary aim was to help consumers access transparent financial planning, opening the financial services market and helping people make better money choices. Open Banking provides apps and services with access to specific and user-controlled banking information so that the apps could better understand patterns of financial behaviour – such as spending and cash flow – to provide users with access to relevant financial services. A consumer might authorise an app to analyse their spending habits to see if there is a bank account that would better suit their financial needs.
But Open Banking is at least, if not more, relevant to businesses that need to gain access to specific financial information for the purpose of verification of funds, ownership of bank accounts or sources of funding. Open Banking enables solicitors to request the specific and relevant information that they need to verify from a client via a simple email. For the client, providing the information is as simple as clicking on a few links and providing access to a banking app or website. Open Banking makes approving the requests for financial information sharing easier through a mobile device (thanks to biometrical information for login to banking apps).
The client remains completely in control of the information that is shared between themselves and solicitors, and this can also straddle multiple bank accounts to overcome the issue of ensuring that all the relevant data is collected at once. The process is completely secure from end-to-end in comparison to downloading data to a local PC.
These kinds of platforms really come into their own when they are applied to source of funds information. Platforms such as Armalytix, for example, can sort data via regular incoming and outgoing sums, making it much easier to see any lump sum or irregular payments that may need further investigation. By carrying out this research directly in the platform, the software makes it much simpler for a solicitor to quickly and effectively identify any transactions that might be of concern and focus on investigating these. This reduces the risk of someone trawling through dozens of pages of bank statements, looking for a needle in a haystack, as well as cutting the cost of carrying out the primary research. The result is a fast, inexpensive, secure and more efficient system.
Bringing banking information to the modern era
The legal profession has understandably been reluctant to embrace wholesale change to processes that have worked successfully for decades. There is always a danger of trying to fix something that is not broken.
However, two growing issues mean firms may need to review their current practices:
- The legal liabilities that solicitors face for any kind of breach of money laundering legislation is growing
- The risk of money laundering through property is also increasing, as highlighted in the report above
As conveyancing is one of the mainstays of many solicitors’ businesses, it is potentially now the most significant area of risk for breaches in AML legislation. Technology is increasingly able to support firms to ensure they are compliant with money laundering legislation by delivering smart access to the right information that helps solicitors identify the information they need to do their job.
