AML: Supervising the supervisor
By Susan Humble
Susan Humble reflects on the AML oversight and regulation regime
“Take nothing on looks; take everything on evidence. There's no better rule”, says lawyer Mr Jaggers to Pip, in Great Expectations. The perfect motto for the Office for Professional Body Anti-Money Laundering Supervision, OPBAS, which has a strictly evidence-based approach to AML supervision. In shortened version: 'show us the colour of your money'. That approach informs how the Solicitors Regulation Authority (SRA) supervises and investigates the ways in which authorised law firms comply with their AML responsibilities. Never heard of OPBAS? Then read on.
What is OBPAS?
OPBAS is housed within the Financial Conduct Authority. It was established by government in 2018 to supervise the 25 professional body AML supervisors (PBSs) in the legal and accountancy sectors, of which the Law Society of England & Wales / the SRA is one. The OPBAS Regulations 2017 give the body powers to ensure that PBSs meet the standards required by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations). Its key objectives are to reduce the harm of money laundering and terrorist financing, by:
1. Ensuring a robust and consistently high standard of supervision by the PBSs overseeing the legal and accountancy sectors.
2. Facilitating collaboration, information and intelligence sharing between PBSs, statutory supervisors, and law enforcement agencies.
Are you feeling guilty for blaming the SRA for its prescriptive AML rules? Well, so you should! When solicitors cry mournfully below the line, who regulates the SRA?', the answer for AML purposes is OPBAS. I recently participated in a routine OPBAS visit to an organisation close to my heart. Audit around AML policies, controls and procedures were indeed robust and meticulously detailed. It was a polite and constructive exercise, if somewhat unsettling, as these visits often are. The occasion got me thinking about how important it is to understand the context for the SRA's approach to its AML supervisory obligations. My curiosity led me to the OPBAS website and its OPBAS Source Book. At 31 pages long, it's a short story compared to the January 2021 'Anti-money laundering guidance for the legal sector' produced by the Legal Services Affinity Group (which should have been approved by HM Treasury by the time you see this article).
Why read the source book? The content helps us to understand the theory behind what the SRA requires solicitors to do, and why. Examples of good and poor supervisory practice add practicality to the theory and can be applied directly to our firms where we are, in effect, professional AML supervisors. We are SRA outposts, tasked equally with implementing the rules, monitoring compliance, and reporting. The following areas of concern and interest are taken verbatim from the SRA's AML annual report published on 22 July 2021:
- Conveyancing – criminals use the proceeds of crime to buy houses to live in, rent, or sell.
- Setting up shell companies or trusts – solicitors and law firms are integral to such transactions.
- Misusing client accounts – criminals will seek to misuse law firm client accounts to ‘clean’ laundered money.
- Failing to carry out proper due diligence – money laundering can take place if firms and solicitors do not carry out sufficient checks on a prospective, new, or existing, client’s source of funds.
On the last point, solicitors must get over their self-sabotaging reluctance to talk to clients or potential clients about where their money comes from. We should ask ourselves how it serves us and our firms not to ask the question – because it matters. If our compliance procedures are met with resistance, that's a potential red flag. One answer to doubters is: organised crime costs the UK economy including you, dear client, more than £37bn every year. The National Crime Agency (NCA) believes there are 4,500 organised crime groups operating in the UK, managing human trafficking and large-scale drug dealing. Dirty money is also used for terrorist financing. Reducing money-laundering activity is important for the benefit of everyone, particularly those vulnerable to exploitation. If it looks too good to be true, it will be.
The penultimate bullet is one reason why it is essential not to allow client accounts to be used as a banking facility. Meat and drink to a money launderer, and bad news for those who assist in that way, generally with the best of intentions, usually 'to be helpful'. Being helpful is no defence. When things go wrong, my coal face Solicitors Disciplinary Tribunal (SDT) experience has taught me that the client who wanted help rarely returns the favour to their solicitor. Call me cynical, but there are many unscrupulous people out there – and they consult solicitors just as often as the nice guys. And they can sniff out an easy target from some distance away.
The regulations require PBSs to provide 'adequate' resources to perform supervisory functions. This has a cost implication for solicitors, in terms of practising certificate fees. Figures from the SRA annual report show that it received 196 money-laundering related reports in the year ended 31st October 2020 – a significant drop from the 2017/2018 figure of 235. The numbers remain relatively small, a source of continuing concern for government, HMRC, OPBAS, and the NCA. The number of internal sanctions imposed by the SRA is moving in the other direction, up to 21 from 10 in 2017/2018. The SDT received 13 cases involving serious allegations (where a fine above £2k, suspension or strike off are likely sanctions if the outcome is a successful prosecution). The SRA observes that investigations are increasing. The trend is expected to be upwards, as indicated by the increase in suspicious activity reports made by the SRA to the NCA, to 26. It is wise to pay attention to the direction of travel on AML enforcement. The thought that 'it won't happen to me' is asking for trouble.
The SRA's exercise of its AML supervisory functions is required by OPBAS to be risk-based. That same approach must be adopted by the regulator to solicitors in relation to the policing of AML activities. It's about assessment of risk, client by client and matter by matter, with a dose of proportionality thrown in. SRA resources are to be focused on the higher money-laundering risk areas. Risk assessment includes consideration of several factors – for example 'adverse media coverage'. Solicitors unwittingly facilitating sales of properties by individuals who do not own those properties are likely to attract unwanted media interest and SRA attention. Property lawyers, this is a case of 'solicitor, beware' if your client due diligence cuts corners.
What does OPBAS's stated 'supervisory approach that supports members’ adoption of a risk-based approach' look like? We are given some helpful hints:
- It encourages achievement of positive outcomes related to reduction of money laundering, rather than compliance with prescriptive and detailed rules.
- It means that there will be more than one ‘right’ answer to the same problem.
- It requires: “Acceptance that money laundering can never be entirely eliminated. Criminals will always try to make use of the proceeds of crime.” Plus: “To attempt to design a zero-failure regime would be damaging and counterproductive. It would place excessive burdens on professional body supervisors and their members and act against the interests of the general public.” The focus is on expectations of what a solicitor with sound controls aimed at preventing money laundering can achieve.
Files and factors
OPBAS expects risk to be assessed against the following factors: (1) Probability – the likelihood of money-laundering taking place in, say, a commercial property transaction (2) Impact – the potential harm if the activity takes place. Risk assessment lives i.e., it requires regular repetition, especially when circumstances change. This applies equally to our files; interim risk assessments are a must have, not a ‘nice to have'. OPBAS highlights an example of good risk assessment practice: “Risk assessment is a continuous process based on the best information available from internal and external sources”. Poor practice looks like this: “There is some understanding of the main areas of risk, but efforts to assess risk are piecemeal and lack coordination, and risk assessment is a one-off exercise”. Wise words for application to our internal client – and matter – risk assessments. Get the risk assessments right, and you are building strong foundations for a happy money-laundering free outcome.
OPBAS describes the supervisory tools available to PBSs, including 'ad hoc information requests'.
Are you ready and prepared with these documents?:
Organisation and legal entity charts; senior management job descriptions; committee composition; documented internal procedures and controls; internal audit records; external auditors' reports; compliance reports; data on suspicious activity reports; breach logs; training and CPD records? If not, you've got catching up to do.
Enforcement action is expected to be effective and proportionate, and applied in a fair and consistent manner. The purpose of enforcement action is to remove the benefits of non-compliance and deter future non-compliance. It can also be remedial and preventive. It does not feel like that when you are on the receiving end. It feels like punishment, pure and simple.
A final point, from the OPBAS Report 2020. Legal PBSs issued 11 fines in 2018/19. Accountancy PBSs issued 226 fines in 2018/19. The average legal sector fine was £31,954, compared with £652 in the accountancy sector. Only two legal PBSs issued any fines for AML in 2018/19. By comparison, 77 per cent of the accountancy PBSs issued fines for AML in 2018/19. Fines remain the usual sanction, with suspension and strike off occurring rarely, in both the legal and accountancy sectors. Consistency in enforcement is a feature for another time – but on OPBAS's radar. If I were a gambler (an occasional flutter on the horses and a quick sashay around the casino in Monaco do not count), I would put a large stake on lawyer AML enforcement increasing. If recent legal press reports are anything to go by, the drinks will be on me.
Susan Humble is a partner at RIAA Barker Gillette. She is former CEO of the Solicitors Disciplinary Tribunal: riaabarkergillette.com