The Solicitors Regulation Authority (SRA) has reviewed ‘a substantial body of data’ for a thematic review of source of funds and wealth compliance, and says it is ‘concerned by the continued levels of non-compliance’.
Data gathered through proactive supervision work over three years has consistently shown that compliance with source of funds requirements remains a concern and many firms need to strengthen their approach, the SRA said.
The key findings of the review, which also included an additional investigation using a sample of 19 firms, include inadequate scrutiny of documents, record-keeping issues, missing audit trails and lack of rationale for decisions.
Out of more than 5,800 files reviewed in 2024–2025, 11% lacked source of funds checks and 18% showed inadequate scrutiny. In 8% of cases, the source of funds recorded in the ledger was not supported by the evidence collected.
‘There is a clear need for greater clarity on when and how source of funds and source of wealth checks should be carried out’, the SRA said.
“While the regulations require firms to adopt a risk-based approach, many firms we engage with continue to express uncertainty about what constitutes a ‘necessary’ check under the MLR 2017. This feedback, also reflected in HM Treasury’s recent consultation response, highlights a broader call from the profession for more illustrative and practical guidance.
“We recognise that professional judgment remains central to applying the rules in context, but we will be working with HM Treasury and stakeholders to examine the existing guidance to help firms apply that judgment with greater confidence and consistency. Ultimately, it will be for firms to ensure they apply the guidance appropriately within their own risk-based frameworks.”
Other challenges identified in the review include time and resource pressures that make thorough checks difficult, especially for smaller firms, client reluctance to share financial information due to cultural or privacy concerns, and fee earner hesitation about offending long-standing clients.
‘This thematic review was initiated in response to our own data, but also the persistent challenges firms have reported to us in conducting source of funds and source of wealth checks’, the SRA said.
“While it draws on our observations over the past three years, its purpose is forward-looking. The review highlights where improvements are needed now and in the future. Some of this work is already underway. Importantly, the review also reinforces our expectations of firms and the consequences of failing to meet them.”
A key outcome of the review has been the production of resources to support the profession in carrying out checks. ‘Guidance has been issued in line with our obligation to provide information on money laundering and terrorist financing practices to law firms working in the regulated sector under Regulation 47 MLR 2017’, the SRA said.
Under the MLR 2017, source of funds checks must be completed as part of ongoing monitoring obligations (Regulation 28(11)(a), MLR 2017), if the client is a politically exposed person (regulation 35 MLR 2017), and if the client is established in a high-risk third country (HRTC) or where either of the parties to the transaction is established in a HRTC (regulation 33 MLR 2017).
Source of wealth checks must be completed when funds will come from a politically exposed person (PEP) or the close relative or associate of a PEP (regulation 35 MLR 2017) or where the client is based in a high-risk third country (regulation 33 MLR 2017).
‘Under regulation 33 MLR 2017, enhanced due diligence must be applied in matters identified as a high risk for money laundering and terrorist financing’, the SRA added.
“This includes conducting source of funds and wealth checks. Source of wealth checks should also be undertaken if the source of funds causes concerns or raises further questions.”
A solicitor commits a principal money laundering offence under the Proceeds of Crime Act 2002 (POCA) in circumstances where they conceal, disguise, convert, transfer and remove criminal property (s327); they enter or become concerned with an arrangement which they know, or suspect facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person (s328); they acquire, use and/or have possession of criminal property (s329).
The SRA explained:
“Failing to identify where funds have derived from or obtain evidence to substantiate the enquiries made, could put a solicitor at risk of committing an offence under POCA. Carrying out a source of funds check helps the solicitor to understand whether funds are legitimate or suspicious.”
The SRA said it recognises the challenges raised by firms during the review, but stressed understanding source of funds is a key control in protecting firms from being used by criminals.
When conducting source of funds checks, firms should answer a series of key questions which is supported with a clear audit trail, the SRA advised:
- Where did the money for the transaction come from?
- How did the client acquire the money used in the transaction or business relationship?
- Do the documents provided match the explanation given?
- Does the transaction make sense in the context of the client’s profile?
- Was it necessary to carry out the checks based on the level of risk?
- Has the firm clearly documented the checks undertaken, or documented why checks were not necessary and why the approach was proportionate to the risk involved?
- Is there anything unusual or suspicious about the source or movement of funds?
The type and the quantity of information and/or documentation required to complete source of funds checks in each matter, and the level of scrutiny, should be proportionate to the client and matter risk profile. A Word document is available for download to help firms record the decisions.
The review also sets out transactions that are high risk for money laundering and require enhanced customer due diligence and ongoing monitoring under Regulation 33 of MLR 2017.
‘The higher the risk involved in a matter, the more detailed and robust the checks should be’, the SRA explained.
“For example, we continue to observe high risk matters such as conveyancing being undertaken with no evidence of source of funds checks on file. This is concerning, as conveyancing remains attractive to criminals seeking to launder money through property transactions…
“Firms need to remain vigilant when working on matters that are inherently high risk for money laundering. The SRA expects firms to carry out source of funds checks on such matters to mitigate the associated risks.”
The SRA has shared a series of resources to aid firms with compliance, including source of funds and wealth FAQs, a form for fee earners, designed to be provided to clients, and a source of funds check and record of evidence.
