The Solicitors Regulation Authority (SRA) has shared advice on how to stay compliant with AML regulations, and warns that enforcement action is set to increase over the coming year.
In a webinar held last month, SRA investigations manager Tracey Bourne said enforcement activity had ‘increased probably by around 100%’ in the last financial year and will continue to rise. However, she acknowledged this was due to more staff and improved processes rather than an increase in the number of breaches, with ‘an overall improvement’ in AML control amongst firms.
In the majority of decisions published recently, the SRA has acknowledged that clients were at never at risk of harm – but the financial penalties act as a deterrent. The strict enforcement of the regulations and rising numbers of investigations – with five more firms fined a total of £118,000 in the last two weeks – have led to a claim that firms would be financially better off by ignoring AML obligations altogether to focus on fee earning.
However, the SRA says the level of fine is set in accordance with the level of risk, how much in-scope work is carried out by the firm, the level of turnover, whether harm has been done and whether any money has been lost. ‘That will dictate to us the band that the fine will fall into,’ Bourne clarified.
In 2023/24, 41% of all fines issued (18 in total) were within the £10,0001-£20,000 bracket. Five fines (11%) were under £2,000, 20% between £2,001 and £5,000, with 16% between £5,001 and £10,000. One fine was issued in the ‘£50,001 and over’ bracket.
The SRA has also noted that only 29% of the matters investigated resulted in enforcement action, with the rest resulting in the case being closed with no further action. Other possible outcomes include the case being closed with guidance, a letter of advice, a warning, conditions on firm authorisation or practising certificates, and referral to the SDT.
With investigations set to be scaled up, AML has shared advice on how to tackle some of the most common issues it identifies – with residential and commercial conveyancing the highest area of risk.
Client and Matter Risk Assessments (CMRAs)
CMRAs were ‘by far the largest area in the last reporting year’, according to SRA senior investigations officer Sarah Jones.
She explained:
“The primary purpose of a client matter risk assessment is to determine the level of due diligence and ongoing monitoring that’s needed based on the risks presented. Since 2019 we have seen a gradual increase in the number of referrals for investigation where the application of client matter risk assessments has been an issue or concern.
“We have found that some firms have no method of risk assessing clients and matters at all so are unaware of the level of due diligence that’s needed. Some firms have a method but are not stringently following this, which could lead to higher risk transactions falling through the crack – this is particularly in relation to conveyancing.”
Other common issues include a ‘file opening’ form being submitted instead of a detailed AML risk assessment, and the CMRA being completed several months into a business relationship.
‘You must have a written process in your PCPs’, Jones said.
“Not only that but you need to ensure that all relevant staff are aware of those processes and any training that’s provided should be recorded. Templates are useful but this should not be considered as a tickbox exercise – ensure that it is suitably tailored to your firm.”
A CMRA must be completed at the beging complete a client matter risk assessment at the beginning of each business relationship, Jones stressed, with any relevant previous matters available or cross-referenced.
“This is particularly helpful for us in investigations and also our colleagues in the proactive supervision team when we are looking at files also be prepared to revisit the client matter risk assessment. If circumstances change throughout the course of that relationship there’s nothing to stop you altering the level of risk throughout a relationship – as long as this is documented with the rationale and as part of your obligations to monitor and manage compliance with your PCPs.”
Policies, Controls and Procedures (PCPs)
PCPs are the second most commonly identified compliance issues found by the investigations team, although Johnson acknowledged there has been an improvement in this area.
Enforcement action ‘is usually taken’ if there is no written PCP in place or several areas are missing. ‘This is aggravated when we find the inadequacy of the PCPs has had an impact at file level’, Jones said.
“We also consider enforcement action for historical breaches of the MLRS if the lack of compliance has stretched over a long period of time. It is rare but we are still seeing firms that don’t have written PCPs in place at all. Some firms have them in place but they are missing some of the mandatory criteria.”
“It’s important to remember that even if something doesn’t apply to your firm it still needs to be covered in your PCPs.”
Independent audits will also be required ‘depending on the size and nature of your firm’. PCPs must be document in writing, kept under review with each version saved for reference, and provided to all relevant staff, Jones added.
Source of Funds (SoF) and Source of Wealth (SoW)
An increasing number of SoF referrals have led to the SRA to instigate a thematic review on the issue, which is ‘a fundamantal element of client due diligence’, according to investigations manager Tracey Bourne.
She explained:
“The source of funds refers to the origin of the funds that are being used to fund a transaction. When you’re undertaking work for somebody you’re not only asking where does the money come from but also how and where did the client get the money for this transaction.
“The need and extent of source of funds check should be informed by your client and matter risk assessment, which is why it’s so important to do that right at the start of a transaction. A practice must scrutinise their transactions on a matter by matter basis with the objective of understanding the source of funds being used.”
A common issue identified by investigators is ‘an overall lack of scrutiny’ where ‘the figures don’t add up’ Bourne claims.
“For example there might be a residential purchase for £500,000, the fee earner has seen that £400,000 is coming from a bank account, they’ve done some sort of funds work and established where £250,000 is coming from but the £150,000 extra is in a black hole, so to speak. That’s obviously a red flag.
“We also see scenarios where the matter might be high value or high risk and no information has been sought in relation to source of funds. We also see situations where fee earners may have obtained bank statements – they’re on the file, the matter is listed as high risk on the client matter risk assessment, but then there is no analysis of where those funds are coming from.”
The final area Bourne highlighted in relation to SoF was third-party contributions, particularly the rising numbers of parents providing deposits for property purchases: ‘It’s always always important to do source of funds checks where there’s an unknown third party involved – specifically where it’s a high value transaction’.
Bourne recommends documenting ‘absolutely everything’ and ensuring either an analysis of the SoF checks are on file, or an explanation for why the checks weren’t necessary in matters identified as low risk. High-risk third countries lists should be consulted when making assessments, she added, along with ‘politically exposed persons and any relatives’.
Firm-Wide Risk Assessments (FWRAs)
FWRAs, or practice-wide risk assessments, address five key risk factors highighted in Regulation 18 of the Money Laundering Regulations. ‘If you haven’t identified the risks at firm level then it’s going to be really difficult to get it right at client and matter level’, Bourne said.
The FWRA should form ‘the backbone’ of AML awareness, she added, with PCPs, training and awareness and customer due diligence all ‘flowing’ from assessment. Although Bourne acknowledged there were few scenarios without an FWRA, some smaller firms have been found to have incomplete records. She added:
“It doesn’t either take account of the five key areas, or perhaps a template’s been used and the template’s been left blank, or it’s not tailored to your firm and its clients.”
Firms with a Lexel accreditation need to ensure the FWRA can be produced in writing, Bourne warned, ‘otherwise the SRA will assume there isn’t one’.
View the SRA’s public AML enforcement webinar at www.youtube.com/watch?v=xkyO9Q0r2oY
2 responses
Obviously compliance is important and especially so when it comes to money launder regulations and rules. However, there is clearly a two tiered system being operated here; The SRA firms are being regularly checked and some fined heavily. SRA firms already go through heavy auditing and checking with Lexcel and CQS etc. But what about the CLC firms?
Clearly there is a lot of training and work going into AML etc. for me, that has taken over what our core job is; conveyancing. Have we all forgotten about conveyancing whilst we are being scared to death over all this AML stuff?
I find the AML stuff incredibly frustrating at the moment. It is not why I came into the job to scrutinise people’s bank accounts, it is not what I was trained to do and it seems that lot of other people are being let off the hook for this kind of stuff (banks, estate agents etc.) and it all comes down to us. Which I get as we take the money in but at the same point, the agents are meant to be obtaining proof of funds before offer and banks are ultimately responsible for what is in their system. We seem to be taking on more and more responsibility and stress when we are the lowest paid legal sector.
This is part of the job and I have no problem with doing this part of the job, we have responsibilities and I am not trying to shy away from them. However, with the way things are going, frankly, I think Conveyancers are going to need a Trade Union sooner rather than later.
Perhaps firms should have a separate AML department away from Conveyancers. At least then let the Conveyancers get on with what they are good at doing and the AML team can sign off all the SOF and SOW.
This whole profession is incredibly depressing at the moment with little to no support provided.
Well said Anonymous – I know many fellow conveyancers have sleepless nights over being fined or worse being sent to prison. It appears our regulator is on an over zealous campaign to find the missing £64 million from other corners. No doubt the government’s new “digitisation scheme” will apply blame to the banks and mortgage brokers (not) and we can get on with what we do best.