Verify 365 CEO and legaltech expert, Rudi Kesic, put the cat among the pigeons at the LegalEx 2022 conference in London when he suggested that solicitors may have retreated from the fight against fraud.
In his address at LegalEx, Rudi pointed to the challenges of fighting fraud in the post-Covid world, and how some of his company’s latest innovations such as blockchain digital identity, automated client onboarding and NFC-biometrics are transforming the legal profession in its fight against money laundering and identity fraud.
The UK has one of the most advanced legal systems in the world. While this is great for businesses and consumers, it makes the UK a lucrative market for fraudsters who want to quickly cash out stolen funds.
UK is a lucrative market for fraudsters to quickly cash out stolen funds
Rudi set out his arguments for why the traditional and manual anti-money laundering and identity verification systems of today are fragmented, and how the latest blockchain-driven technologies can enable a more secure management and storage of digital identities by providing unified, interoperable, and tamper-proof infrastructure with benefits to law firms and consumers.
“Digital technology has led to new opportunities for fraudsters, and the COVID-19 pandemic accelerated this trend as people moved more of their lives online. Yet the solicitors who act as the gatekeepers are not doing enough to prevent the exploitation of their services,” said Rudi.
Blockchain can enable a secure management of digital identities
The latest data from the Solicitors Regulatory Authority (SRA) shows a substantial increase in the number of fines issued to law firms. The main reason for the increase is that solicitors are failing to meet their obligations to detect and prevent money laundering. In addition, the Solicitors Regulation Authority were given new powers to fine rule-breakers up to £25,000, under measures introduced in June 2022.
“There are a mind-boggling variety of regulators, standards, and agencies in the legal sector with responsibility for tackling fraud and enforcing anti-money laundering (AML) compliance. This has led to inefficient policymaking and a lack of accountability in the sector. I think the Solicitors Regulation Authority as the sector’s key regulator should establish a “Digital ID & AML Tech Compliance Subcommittee” with a clear mandate to assist regulated law firms to tackle fraud and implement fraud prevention procedures and technologies.”
Inefficient policymaking and a lack of accountability in the sector
Rudi also pointed out that there is no single, national AML-tech campaign to raise awareness about how solicitors can protect a law firm against fraud, or to educate junior lawyers about the relevant and practical anti-money laundering procedures, or how to effectively verify source of funds and source of wealth in conveyancing transactions.
“The regulators should introduce a single, centrally funded legal sector AML-tech awareness and education campaign in partnership with some the country’s main AML technology providers to remedy this. We are calling for the SRA to be more proactive and endorse AML software solutions, which can provide law firms with the required assurance on their client’s real identity, verify source of funds and offer detailed analytics of whether a transaction might be fraudulent.”
SRA should be more proactive and endorse AML software solutions
Last week, a law firm that was non-compliant with the anti-money laundering rules for three years was fined by the SRA for showing “a disregard for statutory and regulatory obligations”. Scarborough firm Pinkney Grunwells Lawyers agreed to pay the fine of £2,000 in a regulatory settlement agreement with the SRA.
The SRA states that a firm’s decision about whether to use an AML technology provider should be based on a comprehensive understanding of what the system does and how it will help them to address the AML risks presented by the client. If law firms decide to use an automated AML service, they need to ensure that all relevant staff are adequately trained to use it, including how to enter information correctly, and how to correctly interpret the results of digital ID and AML checks.
Money laundering is a major challenge in the legal sector
Money laundering has become a major challenge in the legal sector as it underpins most forms of organised crime in the UK, which allows criminals to develop their operations, deposit funds and hide their assets. Although there are no exact figures, there is a realistic possibility that the scale of money laundering impacting the UK annually is in the hundreds of billions of pounds. It is an ongoing issue for solicitors and conveyancers and has the potential to threaten the UK’s national security, national prosperity, and international reputation.
“The critical importance of the legal sector to the UK’s economy and London’s reputation as the world’s top legal hub, means that property transactions, particularly high value money laundering involving Russian, Chinese or Arab clients, can undermine the integrity of the UK’s legal system and its international reputation,” added Rudi.
“The UK benefits from an active and dynamic market of law firms, supported by a limited number of restrictions on establishing a company in England and Wales. The ease with which a company can be established is frequently exploited by criminals who set up apparently legitimate companies both within the UK and offshore, but which are primarily a mechanism for laundering illicit funds.”
It’s important to note that whilst lawyers can use digital verifiers as a source for ID/AML checks, they cannot rely on digital client due diligence providers in the meaning of “reliance” as defined in Regulation 39 as they are not relevant persons for the purposes of the regulations. If a law practice is relying on digital checks that have been done by an independent provider, they will need to have a fully compliant “reliance agreement” in place as per Regulation 39.
Source of funds checks are a serious issue in the legal sector
Source of funds and source of wealth checks were also identified as a serious issue. The key question that most junior solicitors struggle to understand is how far back they need to go to check when verifying source of funds.
“You need to go back as far as is needed to build a clear picture of how the client accumulated their money for the transaction. For some, it may be as little as six months, particularly if that shows a big event like a significant gift, for others it might require looking back several years. This is a case-by-case assessment and should reflect the level of risk you have identified in your client or matter risk assessment,” said Rudi.
Source of funds – how did the client accumulate the funds?
A source of funds check is to answer the question, “how did the client accumulate the funds for this transaction?” This will need to go beyond where or who the funds have come from and look at why they have the money they do, for example, is it salary, or a gift? Along with answering the question of who the client is (identity check), identifying the source of their funds is one of the most valuable checks lawyers can do to protect their firm from the risk of money laundering and terrorist financing.
Enable clients to share financial information directly from their bank accounts using FCA-regulated Open Banking technology
In terms of how law firms go about an AML check, they can use paper or digital copies of statements, though both carry some vulnerability to fraud. Some services exist, such as Verify 365, which allow prospective clients to share relevant information directly from their bank accounts using FCA-regulated Open Banking technology, while preserving their privacy, which law firms should be using for reliable and comprehensive source of funds checks.
Law firms should feel comfortable using digital client onboarding technology
Rudi added that that the regulators should law firms make feel comfortable using digital client onboarding technology, such as Verify 365, which can enable solicitors to undertake instant and fully compliant AML and identity checks to identify money launderers, verify funds and check sanction lists, thereby disrupting further criminal activity, as well as making the UK’s legal sector a difficult environment for those who seek to use it to launder criminal finances.
The SRA should start a national AML-technology awareness campaign
Creating an AML-tech sub-committee which would include some high-profile AML-technology experts and be backed by a national AML-technology awareness campaign run by the SRA would send a message to law firms that the SRA takes fraud seriously.
“There is an ever-growing list of technology providers and services solicitors can rely on to help protect their firms from fraud – but the SRA still states that there is no requirement for solicitors to use any of them. This is very disappointing, and the SRA should review their policy on this,” added Rudi.
For more information about Verify 365, please visit verify365.app.