The SRA’s recent thematic review on source of funds and source of wealth compliance made for uncomfortable reading: most firms are trying, but too many are still falling down on the basics – especially around evidence, challenge and follow-up in higher risk cases.
A recent decision shows exactly what that looks like in practice. The firm agreed to a fine of £23,588 plus costs over its work for a non-domestic PEP client. Over about three years, the firm acted on almost 200 matters, mainly residential purchases and refinancing, for the PEP and linked companies.
This wasn’t a case where the firm did nothing about the elevated risk profile of the client. The SRA accepts that they collected a lot of source of funds and source of wealth information, senior management approval was in place, and the client’s financial position was documented on file.
The problem was the gaps. Just under 1% of the funds flowing through client account (over £10m in total) could not be backed up with adequate source of funds checks. In terms of source of wealth checks, the firm held financial statements that showed suitably large business income, but with low expenses and most profits being paid straight out as dividends. Those are obvious red flags – but the SRA said they were not properly interrogated. Even though that money did not pass through client account, the regulator found the firm had not taken “adequate measures” to establish source of wealth.
On that basis, the firm admitted a breach of Principle 2 – failing to uphold public trust and confidence in the profession. Not because they ignored AML completely, but because in a high-risk PEP relationship they could not show that their enhanced due diligence went far enough, or that the small unexplained elements had been properly bottomed out.
What this case tells us
This decision mirrors several of the SRA’s key messages from the thematic review.
- Near misses still attract fines – Doing “most” of the work is not good enough, especially in a high-risk case.
- If it’s not evidenced, it didn’t happen – The firm may well have asked sensible questions, but if the file does not show it clearly, the regulator will assume it was not done.
- Don’t just collect documents, make sense of them – Accounts from a reputable firm of accountants do not solve all risk concerns. If the numbers look odd (high profits, no real costs, constant dividends), that should trigger more questions, not fewer.
- PEPs demand real enhanced due diligence – For PEP work, the SRA expects: strong and documented SoF/SoW narratives, genuine senior management oversight and ongoing monitoring that reacts to the risk on the file.
