Tighter criminal background checks for ABS applicants

The Solicitors Regulation Authority is set to introduce tighter ownership suitability requirements for alternative business structures to minimise the risk of criminals getting involved in ABSs, the regulator has confirmed.

According to documents seen by Solicitors Journal, applicants will have to undergo detailed checks before they can be licensed, with the SRA turning down those it is not satisfied meet its proposed requirement.

Under the Legal Services Act, ABS licensing bodies have six months to examine an application, extendable by a further three months.

The SRA's proposed vetting procedure is aimed specifically at preventing the involvement of foreign criminals and will include checks based on OECD sanctions lists, the US's Office of Foreign Assets Control, and international risk intelligence agencies such as Worldcheck (see box).

The overall application procedure will be unveiled at an extraordinary board meeting today, ahead of the SRA's formal submissions to the Law Society council to support its application to the Legal Services Board to become an ABS licensing body the following week (23 March).

It will involve a three-step procedure starting with a rules assessment followed by a risk assessment and a suitability assessment stage.

The rules assessment stage will require firms to provide information about ownership and funding arrangements, including loans, as well as the business areas the ABS intends to derive revenue from and whether referral fees are involved.

The risk assessment stage is described as 'a more subjective element' of the assessment and is expected to take the longest time within the application process. Of particular concern to the SRA is that, given the variety of forms ABSs can take, the risk of criminal activity could be more difficult to detect.

Among the risk scenarios envisaged by the regulator are: a nominee company with an interest in an applicant ABS, holdings in more than one firm, and multiple interest holders with less than ten per cent each (therefore not triggering the compulsory suitability test).

Samantha Barrass, executive director of the SRA, said last week that only a small number of law firms and other organisations would be applying to become alternative business structures by ABS day.

Barrass said although the SRA has had a reasonable number of informal enquiries from a variety of entities ranging from local law firms to private equity, the regulator 'did not expect a deluge' of applications.

The SRA has said it would start issuing authorisations from 6 August, allowing authorised entities to operate as ABSs from 6 October.

Barrass said it was likely that the bulk of early applications would take place around May next year after a period of observation, once firms had the opportunity to assess the workings of the process.