Why our AML regime needs a radical overhaul

The anti-money laundering guidance issued in March 2018 by the Legal Sector Affinity Group (LSAG) – made up of the legal sector’s regulatory and representative bodies including the Law Society – ran to 156 pages. When the guidance was reissued earlier this year, it ran to 212 pages, a 35% increase.

Over the same period, the Solicitors Regulation Authority – which is also a member of the LSAG – replaced its former longer handbook with its shorter Standards and Regulations, on the grounds that written guidance for solicitors needs to be shorter and less prescriptive.

The French bar’s solution is likely to be encouraged internationally in the future... lawyers are not allowed to hold clients’ money, but must pay it in to the bar’s account

As part of this same background, whether there are 156 pages or 212 pages telling solicitors what to do, there has been no let-up in money laundering in those areas of work involving lawyers. The most recent governmental national risk assessment of money laundering and terrorist financing – published at the end of last year – confirmed that buying property in the UK remains attractive to both foreign and domestic criminals; that thousands of properties in London have been bought with illicit funds over the years; and that hundreds of millions are laundered through conveyancing across the UK.

The criticism aimed at the legal profession over its role in AML does not let up, either. The most recent comes from the Council of Europe, of which the UK is a member, in a report from its secretary general on the State of democracy, human rights and the rule of law, published last month: ‘Focus will be applied to ensure that self-regulatory bodies of certain professions that are particularly prone to money-laundering risks, such as lawyers, trust and company service providers, real estate agents and dealers in precious metals and stones, are in turn supervised by a public agency as an additional layer of oversight.’

Something is not working. The SRA’s overall guidance to solicitors is growing shorter, while the guidance on one part of a solicitor’s duties (regarding AML) is expanding rapidly; at the same time as no difference appears to be made in the amount of money laundering taking place.

This is a good time to be thinking about the future relationship between lawyers and AML, because a significant amount of activity is about to take place in the coming months, some domestic, some international. These international aspects are important because our government works closely with global organisations in the fight against organised crime.

Here are some of the activities:

l HM Treasury is about to carry out a review of the money laundering regulations, including a broader look at the effectiveness of the regulations and the AML supervisory regime, with a view to considering options for reform;

l the Financial Action Task Force, which is part of the Organisation for Economic Co-operation and Development and is the main instigator of the AML legislation across Europe, will shortly launch a public consultation on new requirements to regulate the transnational operations of certain sectors, including law firms;

l the European Commission is going to publish a new package of AML proposals early next month, which is likely to include the conversion of the current directive-led legislation into a regulation, giving no leeway to member states, together with some form of supervision of (among others) the European legal profession. This will be short of direct supervision but probably to encourage best practice.

It is difficult to come up with a new way of dealing with a problem which has been with us for a long time. But a radical solution may be what is needed to get the stifling and apparently worthless burden of the current AML regime off our backs, and make a real difference. Here are my suggestions:

l ditch suspicious transaction reporting (STR), but keep the know-your-customer requirements: the US is as much a financial centre as the UK, and yet its lawyers are not burdened with STRs, which do not appear to make any difference in the UK anyway;

l consider the French bar’s solution, which is likely to be encouraged internationally in the future: they have the system of CARPA (Caisses des Règlements Pécuniaires des Avocats), under which lawyers are not allowed to hold clients’ money, but must pay it in to the bar’s account, under the control of the president of the bar. There are over 100 CARPAs in France, and each is under the political and ethical control of the local bar. CARPA is not itself a bank, but works with banks, and the central payment acts as a substantial deterrent against lawyers’ participation in financial crime;

l take the SRA at its word when it says that guidance to solicitors should be shorter and less prescriptive, and make AML guidance to the profession a briefer note based on basic principles only.

Now all that is needed is for our powers-that-be to be similarly bold in tackling this issue.