Anti-Money Laundering Checks for Solicitors
Anti-money laundering (AML) checks are a critical aspect of legal practice, especially for solicitors who handle client transactions that may be vulnerable to misuse by those seeking to launder illicit funds.
In this article, we will look at the different checks and processes that solicitors must perform in order to detect cases of money laundering, the challenges faced during these checks, and the importance of ongoing monitoring and proper reporting of any suspicious activity.
Why Are AML Checks for Solicitors Important?
AML checks are crucial towards preventing the infiltration of illicit funds into the financial system, as since solicitors handle high-value transactions, such as property purchases or corporate dealings, their services are attractive targets for money laundering activities. Without thorough AML checks, these transactions could be exploited to mask the origins of illegally obtained money, posing serious financial and reputational risks to firms.
Legislative Compliance
Adhering to the Money Laundering Regulations (MLR) 2017 and the guidance of the Solicitors Regulation Authority (SRA), solicitors must comply with AML checks across several areas of work that are considered high-risk for money laundering. These include:
- Residential and commercial property transactions
- Corporate transactions (such as mergers, acquisitions, and incorporations)
- Services which involve the creation of trusts or companies
- Certain areas of work involving the provision of tax advice
- Aspects of work involving probate
- Work involving the holding or transferring of funds on behalf of clients
The SRA enforces AML compliance for these areas of work through regular audits, mandatory reporting requirements, and disciplinary action for non-compliance, helping to ensure that solicitors implement robust AML frameworks and act responsibly in the face of potential money laundering risks.
However, if your area of practice falls outside of the MLR 2017, do not fall into the trap of thinking that anti-money laundering regulations do not apply to you. The SRA still expects every single area of law to conduct and document AML risk assessments as appropriate to the area of work and the clients served. Without suitable evidence on the matter file of an adequate AML risk assessment, the solicitor and the law firm in question could find themselves in very hot water.
How Do Solicitors Benefit From AML Checks?
Anti-money laundering checks benefit solicitors and their practices in several ways, such as:
- Risk Reduction: Perhaps the most obvious benefit, these checks mitigate exposure to illicit transactions, decreasing the risk of financial loss and legal penalties.
- Reputation Protection: Stringent AML checks can strengthen client trust, reinforcing the solicitor's relationships and reputation for integrity in legal practice.
- Regulatory Compliance: Thorough firm-wide checks help firms meet mandatory legal obligations, protecting the firm from enforcement actions by the SRA.
- Reducing Global Financial Crime: AML checks are a vital part of a holistic approach to fighting financial crime around the world, helping to maintain a secure and fair system.
What AML Checks Do Solicitors Perform?
There are several important checks that solicitors must strictly adhere to within their practice, all of which are concerned with identifying, assessing, and mitigating risks of money laundering. Let’s take a look at what each measure involves:
- Risk-Based Assessment: Solicitors assess each client and transaction’s risk level to determine the depth of AML checks needed, focusing more resources on high-risk transactions.
- Know Your Customer (KYC) Checks: KYC refers broadly to the process of verifying a client’s identity, understanding the nature of the client’s activities, and assessing the risks they might pose. Advancements in technology, known as “eKYC”, allow this process to be more time-effective and drain fewer resources. Within this framework, there are three main parts:
- Customer Identification Program (CIP): CIP specifically focuses on verifying the identity of clients at the start of the business relationship. This initial step involves collecting and confirming identification details, such as names, addresses, dates of birth, and government-issued IDs (e.g., passports or driver’s license).
- Customer Due Diligence (CDD): This is the standard level of verification applied to most clients after CIP, involving basic identity checks, understanding the client’s purpose for the relationship, and evaluating the source of funds.
- Enhanced Due Diligence (EDD): This is an additional, more intensive layer of checks required for high-risk clients, such as PEPs (explained below) or clients from high-risk nations. EDD includes gathering further information (such as beneficial ownership assessments), closer monitoring of activities, and approval from senior management.
- Politically Exposed Persons (PEP) Checks: Solicitors must identify if a client is a PEP, as these individuals (due to their public roles) present a higher risk. This often entails additional scrutiny and monitoring.
- Sanctions Screenings: Solicitors check clients against sanctions lists to ensure they are not engaging with any individuals or entities that are prohibited by international or national sanctions.
Ongoing Monitoring and Reporting
AML checks are not one-time activities. Ongoing monitoring and awareness of potential risks are just as important in the bid to counter financial crime, and this is one of the most frequent concerns arising in reports from the SRA’s inspections. By continuously monitoring financial activities, solicitors can identify any red flags as and when they first occur, such as activities involving the use of a shell company (a company with no significant assets or operations). This proactive approach is especially important in long-term client relationships, where changes in client behaviour may signal new risks.
Solicitors have a legal duty to report any cases of suspicious activity to the National Crime Agency (NCA), in the form of a “Suspicious Activity Report” (SAR). A SAR is filed when there is reasonable suspicion that a client’s funds or activities may be linked to criminal activity, such as money laundering or terrorist financing. If you have concerns about any unusual activities, consult with your firm’s Money Laundering Reporting Officer (MLRO).
What Challenges Do Solicitors Face?
It is not uncommon for solicitors to face challenges when undertaking AML checks to monitor client activities, especially since financial crime is a complex matter in itself. However, by understanding these challenges, solicitors stand a greater chance of overcoming them. There are typically three main issues which solicitors are likely to face, regarding these checks:
- Not Understanding Their Obligations: Many solicitors may not understand their obligations to follow the measures outlined by the SRA, even if they are outside of the AML-regulated sector; these measures apply to all measures of law.
- Shortage of Time: Unfortunately, time constraints caused by AML checks are something which solicitors have to account for. Therefore, solicitors must factor in the amount of time that each check takes during their daily workload.
- Pressure to Perform: Solicitors work in high-pressure environments where clients expect an efficient, timely service. However, AML checks can be time-consuming, which can result in a delay in the progression of legal matters, and the urgency of meeting client expectations and deadlines can make AML checks feel tedious and burdensome.
How Well Do You Know Your AML Obligations?
At PDA Legal, we understand the challenges and pressures which AML checks place on your firm when balancing legislative compliance vs revenue-generating work. Our comprehensive AML training services can help improve the confidence and efficiency of your team, whilst our AML consultation service can help optimise your processes, providing a smoother, more robust workflow.
For a free initial consultation, please contact our team today.
