Who bears the burden?
John Binns considers the potential impact of imposing an additional burden on firms with the proposed AML levy
The government says that regulated firms should pay to help improve its efforts in tackling money laundering – and the Solicitors Regulation Authority (SRA) agrees. But is it really fair; and how would it work in practice?
The cost of anti-money laundering (AML) compliance in terms of time spent by solicitors and other staff is, by now, well known to most law firms. But the government’s new plan to help fund its fight against money laundering threatens to impose an additional new financial burden.
A number of issues have been raised in the consultation process, with notably different responses from the Law Society and the SRA. So, what will this mean for firms that are already overburdened by these complex issues?
By way of background, it is worth bearing in mind that AML issues can arise for law firms via two different routes, though these overlap substantially in practice.
The first route arises from the principal money laundering offences set out in the Proceeds of Crime Act 2002 (POCA), which involve various forms of dealing with, or being concerned in, arrangements about ‘criminal property’. The offences are subject to exceptions where the person concerned makes a suspicious activity report (SAR) and requests consent, also known as a defence against money laundering (DAML) (POCA sections 327 to 329, 338 and 340).
A solicitor who deals with client money, or who otherwise becomes concerned in a client’s financial arrangements, may be effectively compelled to submit a SAR if a suspicion arises, in order to avoid committing a money laundering offence.
The regulated sector
The second route arises out of the specific obligation to submit a SAR where there are reasonable grounds to suspect that a client (or someone else) is committing a money laundering offence. Unlike the principal money laundering offences, this obligation applies only in the context of work in the ‘regulated sector’.
This includes – among an increasingly broad range of businesses, principally banks and other financial institutions – law firms that provide tax advice, participate in certain financial or real property transactions, or who act as trust and company service providers (TCSPs).
A solicitor who identifies such grounds for suspicion is legally required, with some exceptions, such as where the relevant information is privileged, to submit a SAR, whether or not they also request consent (which would make it a DAML SAR).
Importantly, this obligation to submit SARs under POCA is supplemented by a raft of additional obligations under money laundering regulations (MLRs), which are designed to implement EU directives. Such obligations include preparing firm wide risk assessments and conducting due diligence on clients.
These obligations apply, in effect, to firms and sole practitioners where, and to the extent that, they operate in the regulated sector (see regulations 8(2)(c) to (e) and 12 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).
Taken together, the obligations from POCA and the MLRs impose a strict set of requirements, underpinned by criminal liabilities, that are designed to gather information on suspected money launderers and to divert them from the UK’s financial system.
The government’s approach to tackling economic crime, including money laundering, is complex and beset with issues. While proclaiming the value of involvement from the private sector, particularly the banks, it has consistently underfunded the state institutions that are charged with investigating economic crime. That includes the section of the National Crime Agency (NCA) which is responsible for analysing SARs – the UK Financial Intelligence Unit (UKFIU).
The government’s economic crime plan for 2019 to 22 – formulated, strikingly, by a council comprising senior ministers and chief executive officers of major banks – promised, among other things, a “sustainable resourcing model for economic crime reform”.
Part of that model, it later transpired, was a plan to collect £100m a year by imposing a financial levy on businesses, including law firms, that operate in the regulated sector.
A consultation paper in July last year asserted the government’s belief that “it is fair that those whose business activities are exposed to money laundering risk pay towards the costs associated with responding to and mitigating those risks”; and claimed that the regulated sector “stands to benefit directly from certain specific improvements set out in the economic crime plan”, including reforming SARs and expanding and enhancing the UKFIU.
In its response to the consultation, the Law Society strongly opposed the asserted principle behind the AML levy. It pointed out that law firms already play an important role in tackling money laundering, by complying with its obligations under POCA and the MLRs; and that the benefits of tackling money laundering would be felt by society as a whole, not just the regulated sector.
Instead of imposing what would, in effect, be a tax on law firms and others, the Society said that the government should fund these efforts by general taxation, as well as by fines on offenders and those firms found to have been in breach of their obligations.
The SRA, in contrast, strongly supported the idea. Indeed, it went further by opposing the government’s suggestion that smaller firms should be exempted from the levy. The idea of the exemption was, it said, contrary to the risk-based approach for the levy, under which “firms undertaking work with the highest risk of being used by money launderers should pay more than lower risk firms”.
Despite this, the regulator accepted that it would be difficult to assess in practice which firms carried the highest risks. Further, it did not offer any response or solution to the government’s pragmatic point that the costs of collecting the levy from smaller firms might outweigh the benefits of doing so.
The risks for firms
It is certainly true that some small and medium-sized firms are at a disproportionately high risk of being targeted by money launderers. For sole practitioners and firms with only a handful of partners, the task of keeping up with AML rules and guidance, so as to comply with the MLRs and spot the warning signs that should trigger a SAR, will inevitably be much harder.
Partners and fee-earners who deal with higher risk clients – and even the firm’s money laundering reporting officer (MLRO), whose job it is to ensure AML compliance is carried out – are unlikely to have the expertise to be able to spot such signs in all cases, or to deal with the fallout later on after those signs have been missed.
The consequence will sometimes be that the basis for suspicion about a client is discovered some time after they have used (or abused) the firm’s services – precisely the damage the system is designed to avoid.
However, it does not necessarily follow that smaller firms should pay (proportionately – in other words, relative to their revenue) more than the larger ones; or that they should (as the SRA seems to suggest) be made subject to the levy as a matter of principle, regardless of whether it justifies the cost of collecting it.
The point about larger firms is that they are better resourced to, for instance, be able to employ a full time MLRO, or to use software or external providers to undertake compliance tasks more efficiently.
That does not mean that launderers do not find their way through the cracks, and indeed, it can be worthwhile for a high-end launderer to penetrate the systems of a reputable law firm, to help its appearance of respectability.
Thanks to these and other differences in the nature of the risk between firms of different types and sizes, it is hard to justify any generalised conclusions about which classes of firms are at higher risk than others.
The practicalities of payment
This consideration of risk reflects another issue raised by the consultation, which is how to calculate the amount that a firm should pay. Both the government and the SRA concede that there is, at present anyway, no practical way to calculate a metric by which a firm’s level of payment could vary according to the particular risk it presents.
Instead, the central proposal is to charge a proportion of the firm’s UK revenue (or, as the Law Society prefers, of its revenue from regulated sector work), to be collected by supervisors like the SRA – or, as the SRA prefers, by a bespoke agency.
Controversially perhaps, the Law Society proposes that firms pay in proportion to the number of SARs they submit, rejecting the idea – as floated in the consultation itself – that firms might fail to submit SARs if they were effectively charged fees for doing so.
It draws attention to the risks that are posed outside the regulated sector and result in DAML SARs, raising a question about whether it really makes sense to target a levy only at the regulated sector.
It also makes the point that, in the context of Brexit, it is particularly important for UK law firms not to be placed at a competitive disadvantage by effectively being subjected to a bespoke tax imposed on their businesses.
The proposals in the consultation and these responses reinforce the importance for firms of including, in their firm wide risk assessments required by the MLRs, a consideration of whether and how, if they undertake work both within the regulated sector and outside it, they demarcate one from the other (given the prospect that payment levels may depend on the amount of revenue done within that sector).
This may, in any case, be a sensible step given that valuable work may be done for clients outside the sector without onerous checks, as long as they are not wrongly ‘passported’ into work within the sector.
Firms may also benefit from assessing their current overheads on complex compliance issues, including submitting SARs (DAML or otherwise), measured against which a fee for doing so – which the Law Society suggests may be as low as £209 per report – may turn out to be the most palatable and practical way forward.
Whatever the government decides to do with this proposal, its stated aim is to collect the first set of payments in the fiscal year 2022-2023 – so there is time to iron out the issues and the potential kinks in the system.
While, initially at least, the amounts collected may be relatively small, the principle of making regulated firms contribute financially in this way is likely to provide enough impetus to see it introduced in some form. The main obstacles that may hold it up are about the practicalities of collection.
Ironically, in proposing (in effect) a fee for submitting SARs, which could easily be factored into the ever-imminent changes to the NCA’s online portal – it may be that the Law Society has opened the door to translate the principle into practice.
John Binns is a partner specialising in business crime at BCL Solicitors LLP bcl.com