In a spin
Anti-money laundering procedures are going under the microscope in 2019. Hannah GannagÃ©-Stewart looks at why no firm is exempt from needing top-notch AML compliance going forward
The UK may have leading anti-money laundering (AML) practices but that didn’t stop the legal and accountancy sectors finding themselves subject to criticism in a report published by the Financial Action Task Force (FATF) in December.
FATF is a 30-year-old inter-governmental body tasked with setting AML standards for 38 member states. The publication of its mutual evaluation report at the end of 2018 follows a 14-month assessment of the UK’s AML supervisory bodies, including the Solicitors Regulation Authority (SRA) and the Law Society.
Among seven priority actions listed in the 250-page report was a recommendation that HMRC continue to address “significant weaknesses” in AML supervision by legal and accountancy sector supervisors, of which there are 22 separate bodies.
It said they needed to ensure consistency in their understanding of money laundering and terrorist financing risk, take a risk-based approach to supervision and ensure that effective and dissuasive sanctions are applied.
Risk assessment also featured in another of the seven priority actions, with HMRC urged to “consider how to ensure appropriate intensity of supervision for all the different categories of its supervisory population from low risk to high risk”.
Again, supervisors were placed under increased pressure to “ensure, in accordance with the increased trend for levying penalties, that proportionate, dissuasive and effective sanctions are applied for violations of AML/CFT and sanctions obligations”.
In short, the heat has been turned up on regulators with a remit to supervise AML across the legal and accountancy sectors.
This came as no surprise to the SRA, which was aware of its shortcomings prior to publication of the December report and is already placing greater emphasis on risk assessment.
SRA chief executive Paul Philip made reference to the FATF report and the enhanced onus on AML practices in his speech to the regulator’s COLP and COFA conference in November last year (2018).
“I suspect unfortunately there will be far more change ahead in relation to AML, far more ways of trying to make sure we mini- mise the possibility of money laundering in the UK, and the part solicitors play in that. So, I expect you had better watch that space”, he told the assembled compliance officers in a somewhat disillusioned tone.
Fast-forward three months and the SRA’s executive director of policy and resources Richard Collins has started to address the recommendations made in FATF’s report.
In a paper submitted to the SRA board on 23 January, he highlighted the ongoing work being done by the regulator to shore up its supervision as well as concerns for how this may affect practitioners.
The paper warned that the increased scrutiny, which comes not just from AML-specific bodies but was also flagged by security and economic crime minister Ben Wallace at the end of last year, will lead to “a greater call on resources” for both the SRA and its regulated population.
“We will take care to implement new regulations in a proportionate and targeted way to reduce regulatory burdens where possible, in particular small firms which have a higher BAME profile,” his paper said.
Meanwhile, the Law Society and Bar Council have both been critical of the government’s decision to introduce the Office for Professional Body Anti-Money Launder- ing Supervision (OPBAS).
Established to strengthen the AML supervisory regime, OPBAS’ regulations came into effect on 18 January 2018, despite legal regulators being sceptical as to whether the additional cost to regulated practices was worth it.
In its response to the government’s consultation on OPBAS in 2017, the Law Society wrote: “We find it difficult to judge whether the FCA is correct in saying that the costs imposed by the creation of OPBAS will be proportionate to the benefits. Under the current plans it is the industry and their clients who will ultimately bear the financial burden of OPBAS supervision.”
However, regulatory standards policy adviser at the Council for Licensed Conveyancers Helen Gracie says the creation if OPBAS can be regarded as government pre-empting FATF’s latest findings.
Gracie said she expects all supervisors to place a greater emphasis on risk-assessment and source of funds over the coming year. “Identifying your client is only one part of AML checks,” she explains. “Understanding where the money is coming from and telling more of a narrative about the client is really important.
“We’re trying to flesh out the narrative, so practitioners understand the risks and that it’s not just the foreign high-value purchases that they need to be aware of. It is more of a high-street issue now, there is a wider social impact”.
The emphasis on AML compliance means criminals face a higher chance of detection at larger institutions today than they once did. Gracie says this also increases the risk for smaller practices.
“The money launderers are getting wiser, they’re getting more savvy and I think they are trying to find the gaps. Where they might have gone to a firm in the City, they are now looking to go to smaller practices where policies and procedures might not be as robust.”
Law Society president Christina Blacklaws said its dedicated AML helpline and guidance aimed to help ease the burden on smaller practices.
“While the burden is not directly size-based but reflects relative risk, it may occasionally fall more heavily on smaller firms where these are engaged in high risk activities or work with clients from high-risk jurisdictions,” she said.
“Smaller firms can have fewer resources to juggle the same set of obligations as larger firms, alongside AML compliance.”
As a nationwide conveyancing business based in Newport, Convey Law has always had a stringent know-your-client system in place, head of legal Gareth Richards explains.
“We took a lead on this because we don’t see people face-to-face. We use technology to make sure we’re adequately protected and help us sleep at night”. However, Richards adds that investigating issues that arise through that due diligence can be less straightforward.
“We had a client who wouldn’t comply with our proof of ID information, was very vague about the source of funds and insisted that all communication was by email”, Richards recalls.
“They were very pushy and wanted the transaction to go through as quickly as pos- sible, so obviously that ticked a number of red flags”. However, Richards says, having identified the suspicious activity, trying to get law enforcement to investigate was more difficult.
“I had to speak to our local constabulary, then I had to speak to the Metropolitan Police to say ‘look, somebody needs to go to this house now because I don’t think they’re the actual seller’ and it transpired that we were correct.”
Whether law enforcement is available to investigate or not, the legal profession is certainly going to face greater pressure to report suspicious activity. Last year, lawyers made up just 0.57 per cent of all suspicious activity reports (SARs) to the National Crime Agency.
That equated to 2,660 of the 463,938 total and was 11 per cent down on the previous year. The banks were by far the most prolific, making up 80 per cent of the total volume with 371,522 reports overall, followed by building societies and other credit institutions.
Although lawyers have come in for stick from FATF and the NCA for under-reporting, they still reported higher numbers than gaming firms and casinos, which made just 2,154 and estate agents who were responsible for 710 of last year’s reports.
Quality and compliance manager at Rix & Kay Solicitors Tracey Sullivan believes there is an explanation for the relatively low number of SARs made by the legal profession.
“When you look at the amount of complaints that the banks are making, they’re doing what a lot of people are doing now with the information commissioner, it’s just defensive. They just report absolutely everything in the hope that they’re covering themselves”, she says.
“There might have been 300,000 from the banks but how many of those convert to money laundering? What the NCA don’t say when they’re reporting is what proportion of prosecutions come from which sector. We are probably overly cautious about whether we should or shouldn’t make the report.”
While this may be the case, FATF’s report was clear. “The SAR regime needs a significant overhaul which would improve the financial intelligence available to the compe- tent authorities”, it said.
It then went on to highlight the “underreporting of suspicious transactions by higher risk sectors such as trust and company ser- vice providers, lawyers, and accountants”.
The NCA and the Home Office are currently working on a SARs reform program, which will include a major IT overhaul, replacing technology that it describes as nearing the “end of its life”.
Addressing the concerns of practitioners like Richards at Convey Law, the NCA has also committed to “deliver pilot training courses for law enforcement and develop new e-learning materials, to support and encourage LEAs to further use and exploit SARs in their investigations across all crime types”.
Speaking at the SRA’s 2017 Compliance Officer Conference, NCA director Donald Toon described solicitors as being “at the front line of the detection mechanism for money laundering” but said they were “worse than any other financial services sector in reporting suspicions”.
He said although some of the reporting from the legal profession was very good, often it focused only on identity and too few solicitors were paying enough attention to source of funds.
“Solicitors are a crucial source of information and intelligence on how criminals hide their assets. We have very, very few who are criminally complicit, some who are careless and others who are unsure about their responsibilities”, he said. It is safe to assume that his position is unlikely to have changed on the basis on the latest SARs figures.
Looking ahead, this summer the SRA will publish its latest thematic review, focused on trust and company services providers. It will then address this year’s thematic work, which will focus on the notoriously high-risk area of high-value conveyancing.
The SRA also intends to alter its firm risk-rating assessment to move from an artificial intelligence (AI) based approach to one that combines AI with a more traditional risk matrix using national and sectoral risk assessments.
The regulator is stepping up its work assessing how will firms are mitigating their money laundering risk. As part of this, firms will start to be given a risk rating of compliant, partially compliant or non-compliant. This rating will feed into the firm’s overall risk rating.
Furthermore, in June the SRA will start a full review of its AML programme. This will include an evaluation of how successful the most recent AML regulations have been since they were implemented two years ago.
If the current climate of AML scrutiny is anything to go by, it’s highly unlikely the regulations will be found to be sufficient in their current form.