Did you know that money laundering is estimated to cost the UK economy more than £100 billion each year? Just as a reminder – this is the process criminals and terrorists use to move funds they have earned from illegal activities in a way that makes it look like they earned it legitimately. Essentially, taking ‘dirty money’ and cleaning it.
The burden of preventing money laundering falls on several industries, including the legal sector, a high-risk target for money launderers. With this in mind, your law firm must ensure it meets its anti-money laundering (AML) obligations and manages risk effectively, as outlined in The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and its amendments. Anti-money laundering is an essential aspect of compliance for law firms.
Consequences of money laundering for legal firms
If someone at your legal practice participates in money laundering, the consequences are severe for both the individual and your company. If discovered, the individual in question will likely be struck off and may even face time in prison for their crime. And as for your law firm? Well, it could cost you your reputation. After all, how many existing and new clients will trust a law firm at the centre of a money laundering scandal?
Additionally, suppose your legal practice failed to comply with AML regulations. In that case, authorities may decide to impose fines, or in severe cases, you may risk losing your operation licence. Don’t take the risk. It’s best to ensure everyone at your law firm understands the rules and their anti-money laundering obligations. Our experienced legal accountants at Kale Accountancy Ltd can support you with this.
What is AML?
Anti-money laundering refers to the processes businesses, (like law firms) implement to prevent money laundering at their workplace. AML regulations aim to prevent criminals from abusing the financial system for illegal activities like money laundering, financing terrorism, and other financial-related crimes. Implementing extensive AML processes can protect your legal firm from inadvertently becoming accomplices to money launderers.
AML requirements for law firms
Law firms often serve as intermediaries between clients and financial institutions, meaning they are at a higher risk of encountering funds or assets obtained through illegal activities. As a result, they have an essential role to play in the anti-money laundering process. Any law firm that handles client money and has a client account must comply with AML regulations. Here, we will talk you through some of the critical requirements.
Develop a Practice-Wide Risk Assessment (PWRA)
All law firms must have a comprehensive Practice-Wide Risk Assessment (PWRA) covering the money laundering risks a firm faces. The PWRA must cover these five mandatory risk factors:
- Product & Service Risk
- Client Risk
- Transaction Risk
- Delivery Channel Risk
- Geographic Risk
Developing a PWRA for your practice isn’t a tick-box exercise. It must be a living document regularly updated as new risks arise.
Implement Policies, Controls and Procedures (PCPs)
Once you have a Practice-Wide Risk Assessment detailing the money laundering risks your legal firm faces, you need to determine how to reduce the risks of money laundering with comprehensive policies, controls, and procedures. Policies should cover all your firm’s risks and how you will mitigate them. You must also share your AML policies with all your employees and make them readily available.
Law firms are required to appoint a Money Laundering Reporting Officer (MLRO). A Money Laundering Reporting Officer is responsible for AML compliance at a law firm, ensuring the following of policies and regulatory obligations. The MLRO at your legal practice will also be required to report any suspicions of money laundering to the National Crime Agency.
If your firm has more than one sole practitioner, you must appoint a Money Laundering Compliance Officer. Most often, this will be a board member with the authority to support the MLRO by providing adequate resources and ensuring compliance with money laundering regulations.
Training employees at your law firm on AML
You can implement all the PCPs in the world, but if your people aren’t vigilant against money laundering, they will fail. That’s right – your legal firm employees are your front line when it comes to spotting money laundering red flags and taking the appropriate action, so it’s essential that you upskill them with legal AML training.
Part of training law firm employees on AML should cover what constitutes a ‘red flag,’ i.e., signs money laundering is taking place, how to respond appropriately and report suspicious activity, and the consequences of money laundering on a personal level, as well as for your legal practice.
Money laundering regulations require all ‘relevant’ people to have AML training suitable for their role. A relevant person at your legal firm is anyone able to identify money laundering – not just your solicitors and legal staff but those who hold other significant roles like administration roles.
Training legal staff on anti-money laundering should be ongoing to ensure everyone is current with AML regulations and best practices.
Client Due Diligence
Client due diligence is another critical aspect of the anti-money laundering regulations which apply to law firms. This involves verifying that your client is truthful and requires you to carry out a risk assessment for every new client your legal firm takes on so you can determine the necessary due diligence level.
Remember, money laundering criminals are out to exploit weaknesses, so your firm will be at risk if you aren’t doing an appropriate level of client due diligence.
Client due diligence at legal practices includes:
- Verifying a client’s identity with government-issued identification documents
- Determining whether a client is a Politically Exposed Person (PEP)
- Investigating whether a client is linked to any high-risk third countries or has committed previous crimes
- Verifying a client’s source of wealth, i.e., how they make a living and how they have accumulated wealth
- Seeking evidence of sources of funds
Law firms must continuously monitor their clients’ activities and transactions – including reviewing transaction records, monitoring any changes in clients’ behaviour, and conducting regular audits to ensure that AML controls are working effectively.
Reporting suspicions of money laundering at your law firm
Law firms must ensure that fee earners and other employees know how to report any suspicions of money laundering to the designated Money Laundering Reporting Officer. It is then up to the MLRO to decide whether to contact the National Crime Agency. To do so, they must create a Suspicious Activity Report (SAR) submitted through the National Crime Agency’s online portal.
When submitting a SAR, a Money Laundering Reporting Officer can request a Defence Against Money Laundering. If consented by the NCA, a law firm can continue carrying out an activity that may be otherwise prohibited by the principal money laundering offences under the Proceeds of Crime Act 2002.
How to manage Anti-Money Laundering at your law firm
The best way to manage money laundering risks at your legal firm is to ensure you’re clued up on the requirements of the Money Laundering Regulations. Reading our blog post is a fantastic start, but we also recommend downloading the Anti-money laundering guidance for the legal sector.
Next, ensure you are meeting the requirements. Start by conducting a Practice-Wide Risk Assessment and implementing PCPs to manage identified money laundering risks.
Don’t forget that your anti-money laundering policies must be accessible, followed, and understood by all employees. You are responsible for ensuring they are trained appropriately,
and that client due diligence is carried out efficiently. We recommend continuously monitoring this with quality control audits and ensuring your MLRO tracks the results and reports them back to your firm’s board of directors or partners.
Work with legal accountants to improve AML at your law firm
As experienced hybrid legal accountants, we offer a range of Anti-Money Laundering services for law firms, including AML training, comprehensive PCPs, monitoring and control, client due diligence, and compliance with AML regulations. We can support you in instilling anti-money laundering and client due diligence practices as an integral part of your firm’s culture to give you a solid front-line defence for the fight against money laundering at your legal practice.
Book a free consultation to find out more.
