AML: how law firms can best protect themselves from SRA money laundering fines

In recent years, the Solicitors Regulation Authority (SRA) has issued an increasing number of fines for failures in Anti-Money Laundering (AML) compliance. 

These fines serve as a wake-up call for law firms, signalling that compliance with AML regulations should be a top priority. But what are the lessons from these fines, and how can firms best protect themselves? 

Increasingly costly penalties 

Between October 2023 and March 2024, the SRA issued around £290,000 in fines to 19 firms. In contrast, it issued just six fines for AML shortcomings in the proceeding six-month period, an increase of 217 percent. Legal practices of all sizes are getting slapped with penalties. 

The SRA takes AML breaches seriously because non-compliance increases the risk of criminals exploiting law firms to launder money through legal channels. When money laundering costs the UK economy some £100bn annually, the risk is significant. 

For firms, the consequences of AML violations extend beyond financial penalties. They can lead to reputational damage, loss of clients, and even the possibility of more severe regulatory action.

Critical lessons to avoid fines

The main reasons given by the SRA for these fines include inadequate risk assessments, failure to maintain updated client due diligence, and inadequate AML policies.

So, what can firms learn from these recent AML fines? 

1. Perform comprehensive risk assessments

When inadequate risk assessments are a primary reason for fines, law firms must identify and document potential AML risks at the firm, client and matter levels. 

A thorough risk assessment enables firms to tailor mitigation steps accordingly and conduct the right level of due diligence. Lawyers should remember that no two firms are identical, and neither are their clients. 

2. Implement robust AML policies, controls and procedures (PCPs)

Firms must implement and enforce their AML policies, ensuring all relevant staff members are well-trained in identifying suspicious activity and following proper reporting procedures. 

AML policies, controls and procedures should be regularly reviewed and updated to align with current regulations and best practices. Firms should also ensure any written procedures are updated in line with changes to legislation. 

For instance, there have been several updates this year, which include High-Risk Third Countries, Political Exposed Persons (PEPs) and Sectoral Risk Assessment. If firms have not already reviewed and included these, they should take action now. 

3. Apply ongoing client due diligence monitoring

Failing to update or monitor client information and risk assessments can lead to fines for firms, especially when working with long-term clients. 

Client data and risk assessments should be reviewed at regular intervals appropriate to the client relationship, the transaction and level of risk. Such review is necessary when there is a trigger event, such as changes in ownership, financial activities, or client behaviour.

4. Monitor compliance 

Monitoring compliance is achieved through many different methods, such as file reviews, internal audits or reviews and independent audits. 

Such methods help firms identify weaknesses and areas of opportunity for improvement before a regulatory inspection. Carrying out one or more of these methods can help demonstrate a firm's commitment to AML compliance. 

5. Create a record-keeping habit 

Maintaining detailed records of compliance activities, including client due diligence, risk assessment, staff training and suspicious activity reports is crucial for showing adherence to AML regulations.

These records are evidence of compliance during any inspection, audit or investigation and can help mitigate fines.

6. Enforce ongoing training

Meeting regulatory requirements and avoiding fines requires firms to implement a comprehensive AML training programme for all relevant employees and keep meticulous training records. 

Establishing training as a continuous process rather than a single event is crucial. Regular webinars, knowledge reinforcement sessions, and updates on regulatory changes are just some ideas to ensure all staff are prepared to meet compliance obligations.

7. Using the best technology available

Harnessing technological advancements, such as AI, biometrics, and Open Banking, can augment and expedite processes like Know Your Client (KYC) and Anti-Money Laundering (AML) verification. 

These tech-driven methods save time and resources and protect firms against financial crime, helping them reduce the risk of fraud and stay compliant with ever changing regulations.

Staying compliant

Unfortunately, there is no magic quick fix. To avoid SRA fines, law firms must treat AML compliance as an ongoing responsibility. 

This means fostering a culture where staff actively participate in the compliance process, and alert managers to issues and concerns as they arise. It also means senior leaders actively overseeing and promoting AML compliance throughout the firm.