News focus: The colour of a client’s money

A high street practice in a small town might seem a world away from the horrors of terror attacks and child trafficking. But that assumed disconnect is exactly what the Solicitors Regulation Authority is desperate to shift as it tries to make firms take money laundering obligations more seriously. 

Almost two years on from the introduction of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the message from the regulator is clear: the legal profession is still not doing enough. And those ignoring this issue can expect to find themselves in front of a tribunal before long. 

Under the regulations, solicitors must carry out proper due diligence on clients, verify each client’s identity and check the source of funds, and check the circumstances of the proposed transactions they are handling. Sectors which are most at risk include public works contracts and construction, real estate and property development, and the oil, gas and nuclear power industries. 

The legal profession is seen as fertile ground for criminals hoarding dirty money. Firms routinely handle large transactions and bring a veneer of respectability. There is also a perception that practitioners are blind to the risks and will not ask difficult questions. 

That is why about 400 firms will shortly receive a letter from the SRA demanding to see exactly what has been done to comply with money laundering regulations. Those who cannot – or will not – comply will add to the 60 cases linked to potentially improper money movements referred to the SDT in the past five years. (In this period 40 individuals have left or been thrown out of the profession over money laundering issues.)

Writing for lawgazette.co.uk, SRA chief executive Paul Philip said: ‘The onus is on firms to do what they are being asked to do. Many firms are, but those who are not should be on notice to get their house in order. 

‘Those who fall short should expect to enter our enforcement process. We will judge each case on its facts, but where we find serious issues or a lack of willingness to resolve issues promptly, we will take strong action.’ 

The suspicion is that the SRA is being lent on by law enforcement agents to get the profession’s house in order. The thinking from outside the sector is that too many law firms are undermining the work done elsewhere to address organised crime. 

The onus is on firms to do what they are being asked to do. Many firms are, but those who are not should be on notice to get their house in order 

Paul Philip, chief executive, Solicitors Regulation Authority 

Donald Toon, director of the National Crime Agency, last week noted that of the 464,000 suspicious activity reports (SARs) in 2017/18, 83% came from banks. It was unusual, he noted, to receive an alert from lawyers or accountants. ‘From our perspective there is more reporting than necessary from the banks and a real dearth of reporting from some of the professional services sectors,’ Toon pointedly added. 

Philip insisted the new initiative asking firms for evidence of compliance will affect businesses of all sizes. There are some 7,000 firms who fall under money laundering regulations, and those practices would be well advised to dig out – or start work on – a risk assessment quickly. ‘Firms which do not have one or are not implementing it properly may be committing a criminal offence and are leaving the door open for criminals to launder money,’ added Philip. ‘They are damaging the reputation of the profession and of the UK.’ 

What more can firms do to mitigate the risk? Seek to understand the commercial rationale for a transaction structure, mitigate the risks of identity fraud where they have not met clients face-to-face, and only ever use the client account to hold client funds for legitimate transactions which are incidental to the legal services supplied. All staff – not just compliance officers and senior management – should be briefed on understanding the risks, probing sources of funds, and conducting due diligence on clients and transactions.

The SRA says it is sensitive to the accusation it is taking a prescriptive and burdensome approach to this issue, but that its hand has been forced by the inaction of so many. Impatient law enforcers are tapping their watches. At its compliance conference in December, delegates heard a presentation from the West Midlands Counter Terrorism Unit, explaining how extremists are funding activities for attacks on British soil. It was a sobering message for the 1,000 or so present. 

‘If we don’t successfully address the problem, the social, economic and security consequences can be devastating,’ added Philip.