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Fee earners putting law firms at risk with due diligence failures

'Due diligence is our get-out-of-jail-free card - it's not unnecessary admin'

28 February 2014

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By Manju Manglani, Editor (@ManjuManglani)

Fee earners often unwittingly put their firms at risk by failing to prioritise client due diligence, Amy Bell, head of risk and compliance at QualitySolicitors, has warned.

"Due diligence is our get-out-of-jail-free card - it's not unnecessary admin," said Bell at Managing Partner's 10th anti-money laundering (AML) compliance for law firms conference on Wednesday.

"The problem with due diligence is that it is a tick-box exercise for a lot of people. Fee earners often don't engage with due diligence until they get a prod."

She noted that common failures include treating client due diligence as admin, failing to check the source of funds, assuming someone else is checking client ID, having a false sense of security and forgetting the need for ongoing monitoring.

"Centralising due diligence detaches fee earners from the process, but it is always their responsibility. The most popular method to make fee earners take responsibility for due diligence is to stop their ability to bill until they've done it.

"You need a source of funds policy that applies to everybody uniformly. Fee earners need to know what it is and where the line gets drawn.

"Huge volumes of cash are a problem and need to be investigated; crooks deal in cash-rich businesses.

"Fee earners need to be aware of how your firm will be targeted. Some fee earners don't even read the source of funds documents - they just file it.

"Ultimately, some lawyers will put off due diligence to focus on chargeable work. The problem is our culture - it's a blocker to getting due diligence done. Due diligence needs to be recorded and rewarded.

“It is the responsibility of firms to ensure their AML training is effective and targets these issues specifically to support fee earners to comply with their obligations.”

Online tools such as Google, D&B, World Compliance and World Check can help with conducting background checks on clients, noted Peter Derrick, senior compliance manager at Ogier.

"These are all useful tools for making sure you know who your client is," he said. "Train your staff - please - on how to use them properly."

Other useful resources include the Financial Action Task Force's Risk-Based Approach Guidance for Legal Professionals, Transparency International's Corruption Perception Index 2013, and insurance brokers' risk indicator lists, added Sue Mawdsley, a partner at Legal Risk.

Aside from systems and processes, firms also need to develop more intuitive ways of discerning if they are going to be at risk from taking on certain work. The key test, said Derrick, is: "Does it smell right?"

"If it smells funny, then it probably is funny," agreed Bell.

"If a transaction doesn't smell right, go talk to your MLRO," concluded Derrick.

Recording and reporting

When there is a genuinely-held suspicion of criminal conduct or criminal property involving a client, speakers emphasised that it is vital that detailed records are kept on the information obtained and decisions made.

"Document, document, document," said AML specialist Alison Matthews on meeting regulatory requirements on disclosure.

Firms need to clearly document their decision-making process on when they are reporting or not reporting a case - this can be critical in protecting the firm should problems arise later, she said.

"Ask yourself: if you something turns out to be bad, do I have the information to show that I asked the right questions?" said Derrick.

"If you are going to rely on advice from regulated entities, make sure you document it and why you are doing it," he added, noting that firms should exercise caution when clients claim to be regulated by less well-known entities.

Lack of certainty as to when a suspicious activity report (SAR) should be made was highlighted during the conference as being of particular concern.

In the year to September 2013, the total number of SARs jumped from 278,665 to 316,527 year-on-year, while the total number of consent requests increased from 12,915 to 14,103. Banks took up the highest share of those SARs, with their number of reports rising from 218,021 in 2011/12 to 251,336 in 2012/13.

However, the number of SARs from professional service providers actually dropped in the past year. Accountants made 5,428 reports (compared to 5,749 in the previous year), while legal made 3,935 reports (down from 4,015 previously).

Matthews noted that this dip does not necessarily mean that there is less suspicious activity in the legal sector.

"You report when you have to report - it's not a numbers game," she said. "You report because there are good legal reasons to do so - report not on a defensive basis but because you should do."

When making a report to the National Crime Agency (NCA), she noted that common mistakes which should be avoided include: sending the whole client file and/or any other privileged information; reporting everything 'just in case'; asking the agency for consent to act for a client or accept a client if you cannot get due diligence documentation; and asking the NCA to verify your client's identity.

Asked Matthews: "Are your systems compliant and robust? If not, what systems will you put in place?"

EU anti-money laundering proposals

On 5 February 2014, the European Commission released its fourth anti-money laundering proposals, which intend to ensure consistency in approach across member states.

"The proposals stem from changes made to the Financial Action Task Force recommendations issued in February 2012 and a review by the European Commission on the implementation of the third money laundering directive," said Mawdsley.

Changes to UK law are expected in late 2014. For law firms, this will mean that every firm will be required to have written AML/CTF risk assessments, policies and procedures, as well as a process by which they can test how effective these are, said Mawdsley, noting that firms will need to implement these in a manner which is proportionate to their size.

General guidance can be found on the Law Society's website.




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