SPECIAL FEATURE: Time for the legal sector to take money laundering seriously – SmartSearch

The importance of being fully compliant will be brought into sharp focus this year, as the Solicitors’ Regulation Authority (SRA) further expands its rolling programme of anti-money laundering (AML) visits and desk-based reviews.

This more proactive approach to monitoring AML procedures in the legal sector is set out in the SRA’s business plan covering the period November 2021 to October 2022. It follows an SRA report which identified the main area of AML non-compliance as omitting to have a proper risk assessment, while other issues included poor client due diligence on checks on sources of funds.

The SRA also noted that conveyancing and dubious investment schemes continue to be the two major risk areas for legal firms in relation to money laundering. Conveyancing risks included vendor fraud, where fraudsters try to sell a property without the consent of knowledge of the owner.

Vendor fraud

The issue of vendor fraud is something about which conveyancers should be well aware. The SRA issued an alert in November 2020 warning that solicitors were being approached to carry out conveyancing work on behalf of fake sellers, who often use forged and altered documents or stolen identities.

The alert was accompanied by guidance on potential red flags, including a property being sold for below market value; a client being reluctant or unable to provide documents; documents not appearing genuine; pressure to complete a transaction quickly; a client not requiring searches or other standard work to be undertaken; cash purchases and purchases with funds coming from or going to unconnected third parties.

Unfortunately, despite this vendor fraud has continued to take place. Recently two cases received high profile media coverage. One involved fraudsters selling a man’s home to an unsuspecting purchaser after creating fake documents in his name. The other involved a Lasting Power of Attorney (LPA) being obtained using fake documents by an impostor, who then used the LPA in an attempt to gain legal title to a woman’s flat.

Effective AML

The importance of having effective AML systems in place was underlined by recent research conducted on behalf of SmartSearch among 500 regulated business in the UK. It showed that 40% of respondents in the legal sector had seen a rise in attempted money laundering and/or financial crime in the past 12 months, and 34% worked at companies that had been impacted by money laundering and/or financial crime during that period.

We therefore welcome the SRA’s pledge in its 2021-22 business plan to ‘take robust action where firms are failing in their responsibilities under the regulations’, and its tougher approach towards law firms without effective systems in place to protect them from being used by criminals.

This harder line is certainly needed, given that our research indicates that the legal sector in the UK somewhat lags behind the financial and property sectors in utilising electronic verification of customers instead of undertaking old-fashioned manual checks of paperwork. While 43% of respondents from law firms said they used electronic verification, the figure was 49% for both finance and property professionals.

Electronic verification

However, the biggest disparity between the regulated professions emerged when those still using manual checking methods were asked: “What are the reasons for not switching to electronic verification?” While 62% of legal professionals said they considered a digital solution to be too costly, that view was only given by 26% of finance and banking professionals, and 33% of professionals working in real estate.

There is, of course, expense involved in moving to electronic verification. However, that outlay should be seen in the context of the challenge faced by professionals in countering attempts by criminals to launder dirty money.

The latest threat assessment from the National Crime Agency (NCA) estimates that within the UK at least 70,000 people are engaged with serious crime, and that upwards of £12bn in criminal money is being generated annually. On a global scale, the United Nations has estimated that between $800 billion and $2 trillion are laundered every year.

Money laundering

The pandemic – with its lockdowns and social distancing – has been widely credited in enabling money laundering to flourish as criminals have adapted to the post-pandemic world.

Looking at hard copy documents or at an email with a scanned copy of a passport or driving licence is undoubtedly cheaper than undertaking electronic AML verification. However, using analogue processes in a digital world means that checks are inevitably not as comprehensive as an online system offering electronic ID verification, facial recognition, and digital fraud checks which include use of global databases for sanctions lists and politically exposed persons (PEPs) alerts.

Furthermore, saving money by not investing in electronic verification can end up looking like a false economy when set against the potential for huge fines and potential criminal proceedings that are available to the regulator for AML non-compliance.