Non-compliance fines could be rising—here’s what your legal firm can do to avoid them 

With the SRA’s Anti-Money Laundering annual report 2022-23 finding that just 1 in 3 (30%) of legal firms were fully compliant, it’s clear many firms aren’t doing all that the regulators require of them.

But with talk of rising SRA fines threatening the legal sector, it’s critical that you’re revisiting your AML processes and ensuring your firm is fully compliant. Here, we share our tips for how to stay on the right side of the regulators and protect your firm from regulatory pain and bad actors.

 1. Conduct more robust client risk assessments

Smooth and rapid client onboarding is of course important. However, winning clients should never come at the cost of non-compliance.

To comply with the Money Laundering Regulations (MLR) it’s crucial that you’re thoroughly assessing your clients. According to Regulations 28 (12) and 28 (13) of the MLR, firms must identify and assess the risks posed by each of their clients to inform the level of due diligence that needs to be carried out when working with that particular client.

According to the regulations, your client and matter risk assessments need to:

• Determine the level and extent of client due diligence needed
• Take account of high-risk factors e.g., a PEP or relation to one
• Reflect the risks identified in your firm-wide assessment

2. Prioritise client identification and verification processes 

Know Your Customer (KYC) compliance is a core element within MLR.

When the SRA conducted their investigation, they found that one of the most common issues with non-complying firms was that they were neglecting to verify client identity, and therefore are breaching MLR.

For these reasons, KYC checks should be a fixed component of your compliance management system. This should include:

• The identity of the customer
• The activities the customer is engaged in
• The markets the customer operates in and the other entities in which they have a business
• The risk profile of the customer, including sanctions checks

3. Run Source of Funds checks 

Among the 252 suspected breaches the SRA reported, 39 of them failed to carry out a Source of Funds check. This vital check enables firms to ensure the money they’re receiving is from a legitimate source. Foregoing this can put your law firm at significant risk of being caught up in a money laundering scheme, which could result in large penalties from the SRA, restrictions, or even firm closure.

Properly assessing Source of Funds means checking whether the funds are consistent with:

• The client’s risk profile
• The retainer
• The nature of the client’s business

Manual Source of Funds checks can take time to complete, with plenty of information needing to be manually sifted through, slowing down the onboarding process. But it doesn’t have to be this way. You can leverage the power of compliance automation technology to help you get things done within minutes.

4. Update your AML policies annually 

Technology moves fast. But this also means new threats and risks to your business can also develop just as fast, with criminals constantly evolving their ways to successfully launder money.

To prevent this, and to protect both your organisation and customers from financial harm and reputational loss, it’s critical that you are reviewing and updating your AML policies annually—something the SRA found almost half of firms were neglecting to do.

When it comes to doing this, consider whether your AML policy document comprehensively assesses client and matter risk, whether this is in a single document or separate ones. You will also need to ensure any new processes you’ve put into place to prevent money laundering are documented and that you have a full audit trail.

To properly manage the risk of money laundering, you need to ensure your colleagues are also aware of any changes to your policy and are trained appropriately to deal with any new risk.

As experts in the compliance space, we can help your legal firm to avoid SRA penalties and protect itself from the risks of money laundering. Want to find out more? Get in touch for a chat and find out how we can enhance your AML procedures.

Author

Richard Devine
Account Director

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