SPECIAL FEATURE: What do the regulators expect from lawyers in relation to Source of Funds? – Armalytix

Special Feature: Armalytix has written an article that looks at the question of what regulators expect from lawyers in relation to Source of Funds.

Policies and procedures to ensure law firms have detailed risk protocols that keep most MLROs, MLCOs and COLPs up at night – just ask them.

When in place, these procedures can help to identify bad actors trying to legitimise the proceeds of criminal activity through high-value property investments. The UK’s second place ranking in the list of the top money laundering countries in the world has made AML compliance non-negotiable.

To most in the industry, verifying a client’s source of funds can feel like a complex and time-consuming process, even with recent technological advancements that provide reliable data and enable digitalised due diligence procedures. Most UK firms adhere to custom “Source of Income” questionnaires for clients and ask them to provide at least six months’ bank statements. Unfortunately, traditional risk processes are inefficient and require back-and-forth form filling with tedious communications and processes for clients and lawyers.

As per the SRA and CLC reports, nearly 400 firms in the UK have been asked to demonstrate their AML regulations, with 40 solicitors being suspended or struck off. It is becoming more and more of a hot topic and as we go into 2023 understanding and knowing what the regulators expect, especially in property transactions, should be top of the action list.

Last month, we ran a webinar with Legal Eye as our guests and took a deep dive into both regulatory reports to discuss just how the conveyancing industry can use the report results to better understand what needs to be done.

Key issues

Conveyancing and other legal activities related to high-value/high-volume property transactions have always been classified as high risk. There are many parties involved, but it is the lawyers and conveyancers who share the biggest chunk of the liability. As a result, most traditional AML processes are slow and complex and with criminal practices becoming more sophisticated and advanced, determining whether a client’s documents and bank statements are authentic is difficult and exhausting.

Since 2020, both the SRA and CLC have carried out extensive risk assessments and findings in their most recent reports show that for many firms there is a lot of work to do:

- SRA AML Report Statistics
  - According to HM Revenue & Customs, nearly 68 estate agents, lawyers, and firms were found in breach of AML regulations in Q1 2022 alone, with fines higher than £500,000.
  - According to the SRA, failure to carry out a Source-of-Funds check is one of the three main and significant reasons for AML reports.
- CLC AML Report Statistics
  - According to the 2022 report, nearly 51 AML practice monitoring inspections were carried out. Only four practices were considered compliant. 27 were generally considered compliant with minor changes, whereas the remaining 20 were non-compliant and required a major overhaul in policies and procedures.
  - 60% of non-compliant practices in the report could not provide an AML training record. Similarly, 45% of these practices didn’t have sufficient sources of funds enquiries to determine whether a client’s transaction was legitimate.

All these stats (and more) show that Conveyancing will remain high risk unless there is an industry-wide commitment to include a comprehensive and secure verification of Source of Funds in the due diligence process. As shown in the two reports, regulators are more than likely to increase the amount of scrutiny by imposing heavier and more frequent fines for non-compliance.

It appears that the latest AML regulations are gradually shifting from a form of guidance to strict enforcement. There is an expectation that practitioners, when using the tools and technology available to them, can demonstrate that they have made best endeavours to determine whether their client’s wealth and source of funds correspond to their own knowledge about that client.

Independent AML Audits

The importance of an independent audit could not be keener. On the 20th January 2021 the LSAG published new Anti-Money Laundering Guidance for the legal sector stating that: “The practice must conduct an independent audit of the adequacy and effectiveness of its AML policies, controls and procedures”.

The 2022 Autumn SRA report then highlighted that 51% of firms had not undertaken an independent audit and of these 45% should have had one.

So, what can be done? Just how an Independent AML Audit can be conducted will of course depend on each firm. However, from staff training to improved technology and SMS systems, there are ways to ensure adherence without feeling the burden. How frequently ought firms be evidencing the training they provide? What can be expected on an SRA/CLC visit?

See the quick takeaways from our discussion:

- Both regulators agree that most firms will benefit from another set of eyes
- Screening of staff is a hot topic – LSAG guidelines pg. 122 offers suggestions on what you can do to screen your staff.
- MLRO, MLCO and COL P will be interviewed
- 2-3 members of staff will be interviewed
- 4-8 file reviews conducted
- A firm will be asked to provide feedback and clarification around what might have been done on a particular file
- Both regulators are looking for a disconnect – is the frontline following all the firm’s procedures?

Armalytix and Legal Eye – a powerful combination

Armalytix is a data intelligence firm that allows clients to safely share Open Banking and other data to deliver financial insights to legal firms, helping them conduct faster and more effective Source of Funds and Wealth checks. It has helped hundreds of businesses and professionals in the conveyancing sector perform digital checks through intelligent data analysis to help clients get the data, answers, and evidence needed to stem financial crime.

Legal Eye are all things risk and compliance. With over 15 years in the sector and a team of solicitors who are passionate about assisting lawyers, solicitors, and other professionals in UK’s legal sector comply with their regulatory obligations, they provide sound knowledge and practical solutions.