Verify 365 News

30 October 2022 – London

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.

Mark Boyle, policy lead on anti-money laundering for the SRA, said that the idea that firms need to check only whether clients have a UK bank account is a myth.

“The key is knowing who your client is and understanding who your client is and understanding why they have come to you – does it make sense? You really need to be checking how did the person get their money? Be it through salary, investment, or gifts. It can be many legitimate means, but you need to understand that and be evidencing that.”

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.

In 2020, the firm had declared to the SRA that its firm-wide risk assessment was compliant with the 2017 Money Laundering Regulations – 40% of its work was conveyancing and so within their scope.

However, an investigation began soon after, following a referral from the SRA’s AML proactive supervision team, showed this was not the case.

There are five key risk areas which must be assessed as part of the process – clients, jurisdictions, products/services, delivery channels and transactions – and the firm had not covered the final one. Law firms can decide which areas of their practice are at risk and must put in place measures to prevent money laundering by using what’s known as a “risk-based approach”, which involves following a number of steps.

AML checks for Solicitors

The following steps should be followed:

1. Identifying the money laundering risks that are relevant to your law firm

2. Carrying out a detailed risk assessment of your law practice, focusing on client behaviour, delivery channels and so on

3. Carrying out a risk assessment of your clients

4. Designing and putting in place controls to manage and reduce the impact of these risks

5. Monitoring the controls and improve their efficiency, and

6. Keeping records of what you did and why you did it

Further, the risk assessment undertaken by Pinkney Grunwells Lawyers “failed to have sufficient regard for the Legal Sector Affinity Group guidance, our sectoral risk assessment and warning notice”.

The firm also did not have in place compliant policies, controls and procedures to prevent money laundering, as required by the regulations.

Among the omissions were how to identify and scrutinise complex and/or unusual large transactions, how to identify and scrutinise transactions that have no apparent economic or legal purpose, how the firm identified and verified clients, and its position on source of funds/wealth checks, and on transactions in high-risk jurisdictions.

Pinkney Grunwells failed to screen relevant employees during employment as well and could not provide a record of the staff training it said had been undertaken.

The SRA said a review of a sample of client files highlighted multiple shortcomings, such as failing to keep records and source of funds evidence not being collated by fee-earners.

“Failure to properly identify where funds have derived from could put the firm at risk of committing a section 327 offence under the Proceeds of Crime Act 2002.”

Pinkney Grunwells admitted multiple breaches of SRA principles and rules.

The SRA said:

“The conduct showed a disregard for statutory and regulatory obligations and had the potential to cause harm, by facilitating transactions that could have led to money laundering (and/or terrorist financing)… The lack of compliance showed an AML control environment failing at the firm.”

The fine was “a proportionate outcome in the public interest because it creates a credible deterrent to others and the issuing of such a sanction signifies the risk to the public, and the legal sector, that arises when solicitors do not comply with anti-money laundering legislation and their professional regulatory rules”.

Separately, the SRA has fined Anjum Shahzad, sole director of East London firm Shahzads Law, £1,200 for substantially the same offences.

He too did not have a compliant assessment in place for three years – but by contrast had admitted it in his declaration to the SRA – while the firm’s PCPs had not been updated since 2015.

The fine – £1,500 discounted by 20% – reflected his mitigation, remedy of the breaches, prompt admissions, “the continuing compliance moving forward”, and the fact that Mr Shahzad was the sole fee-earner at his firm conducting work in scope of the regulations.

Last month, Surrey law firm Buglear Bate & Co was for the same offences. But by reaching a regulatory settlement agreement with the SRA, they did not face the Solicitors Disciplinary Tribunal.

The investigation found that, despite Buglear Bate having declared in 2020 that its firm-wide AML risk assessment was compliant with the requirements, in fact it was not.

“The risk assessment the firm had in place failed to consider the firm’s delivery channels and failed to have sufficient regard for the Legal Sector Affinity Group guidance, our sectoral risk assessment and warning notice.”

Further, the firm did not have in place compliant AML policies, controls and procedures because, among other elements, they did not cover identification and verification procedures, ongoing monitoring of clients and their matters, the identification of politically exposed persons and source of funds information.

The firm’s matter risk assessment form was also not compliant. “The form was intended to be filled in by the client, not the firm. The matter risk assessment is for the firm to complete, to identify and assess the risks posed by the client and matter.

“One purpose of assessing the risks of any matter is to determine whether enhanced customer due diligence is required. The form, as it stands, is of no assistance to the person making the assessment in deciding this.”

The SRA went on to find that these failures translated into shortcomings in transactions Buglear Bate handled.

In one, the firm failed to conduct adequate ongoing monitoring and scrutinise the transaction, including necessary source of funds checks, when £75,000 was received into its client account.

Documentation only described that the money as being £25,000 from “rentals” and £50,000 from a “loan”. “There was no further information provided, eg whether the loan was personal or commercial, or any evidence for this,” the SRA said.

On another matter, there was a note on the file that it was “Below AML threshold” and so the source of funds did not need to be scrutinised. The SRA said customer due diligence must be undertaken for all transactions in scope of the 2017 Money Laundering Regulations, outside of very limited exceptions.

Buglear Bate further failed to identify warning signs listed within the SRA’s warning notices on money laundering and terrorist financing, “specifically with respect to source of funds being unusual and unexplained payments from third parties and loans from non-institutional lenders”.

The firm admitted multiple breaches of principles and rules.

The SRA said the conduct “showed a disregard for statutory and regulatory obligations and had the potential to cause harm, by facilitating transactions that could have led to money laundering (and/or terrorist financing)”.

The lack of compliance showed an “AML control environment failing” at the firm.

In mitigation, the regulator acknowledged that there was no evidence of harm to consumers or third parties, the firm did not financially benefit from the misconduct, and it “has assisted us throughout the investigation, admitted the breaches and has shown remorse for its actions and remedied the breaches”.

AML Checks for Law Firms – using technology to prevent fraud and money laundering

Rudi Kesic, CEO at Verify 365, a digital client onboarding and money laundering prevention platform, said:

“Money laundering is 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.”

Money laundering 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 Kesic.

“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 apparently legitimate companies both within UK and offshore, but which are primarily a mechanism for laundering illicit funds.”

What is Verify 365 and how can AML technology help law firms?

Rudi added that law firms should be using digital client onboarding technology, such as Verify 365, which enables solicitors to undertake instant AML and identity checks to identify money launderers, therefore disrupt 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.

By working in partnership with law enforcement and regulation agencies, Verify 365 are helping to support law firms by providing the best digital onboarding technology for AML checks to help solicitors and conveyancers to spot the signs of money laundering and identify and stop fraud.

“If you work in legal services and suspect that your law firm is under threat from money laundering or terrorist financing, you should call Verify 365 to assist your practice with implementing a digital client onboarding system,” added Kesic.

Firms are well-advised to review their AML policies, application at case level, and their firm-wide risk assessments and take immediate action to ensure they are sufficiently robust or update them to achieve and maintain a compliant status.

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