Money-Laundering: Who Bears the Burden and How Would It Work?

The government says that regulated firms should pay to help improve its efforts to tackle money-laundering, but is this really fair, and how would it work in practice?

Costs upon costs

The cost of Anti-Money-Laundering (AML) compliance, in terms of time spent by conveyancers, estate agents and others, is, by now, well known. But the government’s new plan to help fund its efforts to fight money-laundering threatens to impose a new financial burden on top. A number of issues have been raised in the consultation process, with notably different responses from the Law Society and the SRA. So, what will this mean for firms that are already overburdened by these complex issues?

The issues for conveyancers and estate agents

By way of background, it is worth bearing in mind how AML issues can arise for conveyancers. The principal money-laundering offences in the Proceeds of Crime Act 2002 (POCA) are subject to exceptions where the person concerned makes a Suspicious Activity Report (SAR) and requests consent, also known as a Defence Against Money-laundering (DAML). There is also an obligation to submit a SAR where there are reasonable grounds to suspect that a client is committing a money-laundering offence, which applies only in the context of work in the ‘regulated sector’, including law firms that participate in certain real property transactions, estate agents, and others. This obligation is supplemented by a raft of additional obligations under money-laundering regulations (MLRs), which include preparing firm-wide risk assessments and conducting due diligence on clients.

The government’s approach

The government’s approach to tackling economic crime, including money-laundering, is complex and beset with issues. While proclaiming the value of involvement from the private sector, particularly the banks, it has consistently underfunded the state institutions that are charged with investigating economic crime. Its Economic Crime Plan for 2019-22 promised, among other things, a ‘sustainable resourcing model for economic crime reform’. Part of that model, it later transpired, was a plan to collect £100 million a year by imposing a financial levy on businesses, including law firms and estate agents, that operate in the regulated sector. A consultation paper in July last year asserted the government’s belief that ‘it is fair that those whose business activities are exposed to money-laundering risk pay towards the costs associated with responding to and mitigating those risks’, and claimed that the regulated sector ‘stands to benefit directly from certain specific improvements set out in the Economic Crime Plan’, including reforming SARs.

The Law Society and SRA responses

In its response to the consultation, the Law Society strongly opposed the asserted principle behind the AML levy, pointing out that law firms already play an important role in tackling money-laundering, and that the benefits of tackling money-laundering would be felt by society as a whole. The SRA, in contrast, strongly supported the idea, even opposing the government’s suggestion that smaller firms should be exempted from the levy. The idea of the exemption was, it said, contrary to the ‘risk-based approach’ for the levy, under which ‘firms undertaking work with the highest risk of being used by money launderers should pay more than lower risk firms’.

The risks for firms, large and small

It is certainly true that some smaller and medium-sized firms are at a disproportionately high risk of being targeted by money launderers. For them, the task of keeping up with AML rules and guidance, so as to comply with the MLRs and spot the warning signs that should trigger a SAR, will inevitably be very much harder. Those who deal with higher-risk clients, and even the Money-Laundering Reporting Officer (MLRO) whose job it is to ensure AML compliance is carried out, are unlikely to have the expertise to be able to spot such signs in all cases, or to deal with the fallout later on after those signs have been missed.

It does not necessarily follow from that, however, that smaller firms should pay (proportionately – in other words, relative to their revenue) more than larger ones. The point about larger firms is that they are better resourced to be able, for instance, to employ a full-time MLRO, or to use software or external providers to undertake compliance tasks more efficiently. That does not mean that launderers do not find their way through the cracks, and indeed, it can be very worthwhile for a high-end launderer to penetrate the systems of a reputable law firm or estate agent, to help its appearance of respectability.

The practicalities of payment

This consideration of risk reflects another issue the consultation raises, which is how to calculate the amount that a firm should pay. Both the government and the SRA concede that there is, at present anyway, no practical way to calculate a metric by which a firm’s level of payment could vary according to the particular risk it presents. Instead, the central proposal is to charge a proportion of the firm’s UK revenue. Controversially perhaps, the Law Society proposes that firms pay in proportion to the number of SARs they submit, rejecting the idea (as floated in the consultation itself) that firms might fail to submit SARs if they were effectively charged fees (which it suggests may be as low as £209 per report) for doing so.

The next steps

Whatever the government decides to do with this proposal, its stated aim is to collect the first set of payments in the fiscal year 2022/23 – so there is time to iron out the issues and the potential kinks in the system. While, initially at least, the amounts collected may be relatively small, the principle of making regulated firms contribute financially in this way is likely to provide enough impetus to see it introduced in some form; the main obstacles that may hold it up are about the practicalities of collection. Ironically, in proposing (in effect) a fee for submitting SARs, it may be the Law Society that has opened the door to translate the principle into practice.

John Binns is a partner at BCL Solicitors LLP, where he assists firms with complex AML issues.

Kindly shared by BCL Solicitors LLP