11 July 2023 – Money laundering continues to be a pressing concern within the legal industry, with small law firms being particularly vulnerable due to the lack of tech infrastructure.
The Solicitors Regulation Authority (SRA) has reported a surge in suspicious activity reports (SARs) involving money laundering, amounting to over £75 million in the last financial year. Astonishingly, 70% of these SARs were linked to sole practices or law firms with ten or fewer fee-earners. The majority of these reports were related to conveyancing transactions, which continue to be identified as the highest risk area for money laundering.
The SRA’s annual report highlighted the importance of small firms recognising money laundering red flags and conducting thorough due diligence and source of funds checks on clients and associated third parties. Firms that failed to implement these safeguards were prevalent in almost all SARs submitted. The report signifies a big rise on the 178 additional cases flagged for monitoring in the 18 months ending in April 2022. At the same time, the regulator reported £161m worth of transactions during that period.
Conveyancing transactions were not the only risk area mentioned in the report. Other areas of concern included the misuse of client accounts, aborted or fake property transactions used as a means to circulate funds through a law firm, and transactions with no underlying legal purpose. Additionally, the report identified risks such as funds being broken up into multiple transactions, dealing with clients from high-risk countries, involvement of third parties, use of informal money transfer systems, and potential tax evasion.
While the SRA reported a rise in investigations related to potential money laundering, terrorist financing, and sanctions-related risks, feedback on the outcomes of SARs from law enforcement agencies was often limited. However, there have been instances where the information provided by the SRA assisted in financial and organised crime investigations involving tax evasion, money laundering, fraud, and asset recovery.
The report serves as a reminder to small law firms to prioritise compliance with Anti-Money Laundering (AML) regulations and to remain vigilant in identifying and reporting suspicious activities. Collaboration with law enforcement agencies, such as the NCA, HM Revenue & Customs (HMRC), and the police, is crucial for effective reporting and investigation of potential money laundering cases.
Azeem Rashid, Director at Verify 365, emphasised the importance of vigilance and proactivity in addressing these risks. He stated, “Small law firms need to take a proactive stance against money laundering risks. By implementing robust AML measures, staying informed about regulatory changes, and collaborating with law enforcement agencies, these firms can safeguard their operations and maintain trust within the legal profession.”
“Our own findings reveal that within the legal sector, it is the smaller firms – especially those lacking adequate tech infrastructure which are more susceptible to money laundering activities, leading to poor AML statistics,” said Azeem.
“Regulatory and enforcement bodies must recognise and respond to the evident trend of firms being targeted by fraud, illustrating the urgency to implement preventive measures and provide appropriate guidance to protect businesses from potential risks,” added Azeem.
In the ever-evolving landscape of Anti-Money Laundering (AML) compliance, technology plays a crucial role in mitigating risks for small law firms. Implementing AML tech solutions can significantly enhance risk management and compliance efforts. One key area where technology can make a difference is digital client onboarding solutions that focus on risk and compliance. By leveraging automated, digital biometric checks, these solutions enable small law firms to efficiently verify the identities of clients and conduct thorough sanction checks, replacing time-consuming manual processes. This not only speeds up the onboarding process but also ensures robust compliance with AML regulations.
Another powerful tool is the utilisation of Open Banking for assessing source of fund evidence. By accessing real-time financial data through secure APIs, small law firms can verify the legitimacy of clients’ funds and gain insights into their financial history. This helps identify any potential money laundering risks and enhances due diligence practices.
The adoption of electronic signatures instead of traditional pen-and-paper signatures is another legaltech solution that streamlines processes while maintaining compliance. Electronic signatures provide a secure and efficient way to obtain legally binding signatures, reducing paperwork and including identification within the signature workflow.
Moreover, utilising Ultimate Beneficial Owner (UBO) reports instead of basic company summaries adds an extra layer of transparency and risk assessment. UBO reports provide detailed information about the individuals who ultimately own or control a company, allowing small law firms to better understand the ownership structure and potential risks associated with their clients.
By leveraging these AML tech solutions, small law firms can significantly enhance their ability to detect and prevent money laundering activities. These technologies streamline compliance processes, improve efficiency, and strengthen risk management practices, ultimately helping small firms maintain regulatory compliance while mitigating the inherent risks associated with money laundering.
