Jon and the team
Reminder: AML & Sanctions Data Submission Deadline
All regulated firms must submit their anti-money laundering and sanctions compliance information to the SRA by 1 p.m. on 23 September 2024. Even if your firm does not engage in work within scope of the Money Laundering Regulations, a “nil return” is required, and all firms have to respond to the sanctions part. Submissions must be made via the SRA online portal by your COLP, MLCO, or MLRO.
See also: Understanding The SRA’s AML Data Collection Exercise 2024: A Guide For COLPs
5 Lessons your firm can learn from SRA AML fines
Regular readers of this newsletter will know that the SRA has been ramping up its efforts to combat money laundering within the legal sector. As part of this crackdown, numerous firms have faced substantial fines for failing to meet their Anti-Money Laundering (AML) obligations following targeted regulatory visits.
The SRA now wields unlimited fining powers for matters involving financial crime. That means no formal hearing is necessary. If the financial penalties consultation amendments come into force, the minimum fine for the most serious offences will start at £500,000 for firms (£100,000 for individuals), and could go up to as much as 10% of global turnover.
While these fines can be financially damaging, they are also a severe blow to reputation.
On the plus side, publicised decisions can offer valuable lessons that can help firms avoid similar pitfalls in the future.
Here are 5 key lessons your firm can learn from the SRA’s recent AML fines to strengthen your compliance framework and safeguard your reputation.
A Proactive Approach to Preventing Sexual Harassment: What COLPs Need to Know
With the introduction of the Worker Protection (Amendment of Equality Act 2010) Act 2023, set to come into force in 2024, law firms face a critical shift in their responsibilities regarding workplace harassment, says Debbie Fowler. This new legislation requires firms to take proactive steps to prevent sexual harassment, moving beyond reactive measures and aiming to foster a safer and more respectful workplace culture. Additionally, employers will be held liable for third-party harassment, significantly expanding their obligations.
Why This Matters to COLPs
COLPs (Compliance Officers for Legal Practice) play a pivotal role in ensuring that their firm not only complies with legal standards but also maintains a workplace environment that upholds the highest ethical and professional values. The new duty under the legislation emphasises the importance of a preventative approach. Firms should not wait for incidents to occur but must anticipate and mitigate risks. This aligns with the SRA Principles, which emphasise acting with integrity, upholding public trust in legal services, and promoting equality and diversity.
ICYMI: Ensuring compliance in law firm M&A transactions: A guide for solicitors
As the legal industry evolves, mergers, acquisitions, and sales are becoming more frequent among law firms. Whether for strategic growth, market consolidation, or retirement, these transactions offer significant opportunities. However, they also come with substantial compliance risks that can jeopardise a firm’s reputation and stability if not handled correctly.
In this blog, we’ll dive into the compliance issues that solicitors and law firms must consider when navigating M&A transactions, based on recent warnings from the Solicitors Regulation Authority (SRA).
ICYMI: How the Metropolitan Police’s £55M money laundering convictions highlight the importance of law firms’ AML compliance
In August 2023, the Metropolitan Police broke up a £55 million money laundering ring operating in Hackney. This complex scheme involved several individuals who laundered large sums of money through “Chinese underground banking systems” and other informal value transfer systems (IVTS). The group used a network of couriers and anonymous transactions to facilitate the movement of illicit funds, ultimately leading to their conviction and the seizure of significant assets. The criminals involved were sentenced to a total of almost 25 years in prison.
This high-profile case underscores the growing use of underground banking systems for laundering criminal proceeds, raising serious concerns for solicitors involved in financial transactions. For legal professionals, understanding these informal banking systems is essential, as they can inadvertently become entangled in money laundering activities if they fail to conduct proper due diligence.
News and Guidance
- SRA | Firm anti-money laundering and sanctions data requirements – The SRA has set a deadline of 1 p.m. on 23 September 2024 for all regulated firms to submit information related to their compliance with the anti-money laundering (AML) and sanctions regimes. Firms must provide details on:
- Work that falls under the scope of the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017.
- Any contact or involvement with sanctions regimes or designated persons under those regimes.
- Submissions of suspicious activity reports to the National Crime Agency (NCA).
If your firm does not engage in this work, a “nil return” must still be submitted to ensure the SRA’s records remain accurate. Only individuals in certain roles, such as the COLP, MLCO, or MLRO, can complete the questionnaire. Firms should aim to provide accurate data, although estimates are acceptable if exact figures are unavailable.
You must use the SRA’s online portal to submit your information, and this cannot be done via email or post unless agreed as a reasonable adjustment. Make sure you have a valid mySRA account to access the form.
Note that the questionnaire places much more emphasis on trust and company service provider (TCSP) work (including company formation, company secretarial, and acting as a professional trustee) than we have previously seen. This could signal a shift in the regulator’s focus about ‘in scope’ activities, beyond transactional legal services.
- Law Society | Practice Note – Compliance officers – This updated Practice Note provides detailed guidance on the roles of Compliance Officers for Legal Practice (COLPs) and Compliance Officers for Finance and Administration (COFAs), including:
- Key Roles and Responsibilities: COLPs are responsible for ensuring that their firm complies with SRA regulatory arrangements. COFAs focus on the SRA Accounts Rules, ensuring that client money is managed in line with regulatory requirements. COLPs and COFAs must report serious breaches to the SRA and ensure that systems are in place for compliance.
- Reporting and Compliance: Compliance officers must report serious breaches to the SRA as soon as reasonably practicable. While there are no strict definitions of “serious,” factors such as client detriment, loss of confidence, and patterns of breaches should be considered. Records of breaches must be kept and monitored, even if they are minor, as patterns can indicate a more significant issue.
- Appointment: Every firm authorised by the SRA must have an approved COLP and COFA. In smaller firms (under £600,000 turnover), “deemed approval” applies, meaning no formal approval process is needed. The same individual may be appointed as both COLP and COFA, particularly in smaller practices.
- Personal Liability: Compliance officers may face regulatory action if they fail to fulfil their responsibilities. While firms’ managers remain ultimately responsible, officers should consider indemnity agreements or insurance to protect against personal liability.
- Law Society | Practice Note – Conflicts of interests – It is always useful to go back to basics, and this updated Practice Note on conflicts is a good opportunity to remind your team of the core rules. The Practice Note outlines how solicitors can identify and manage situations where a conflict of interest arises or there is a significant risk of it occurring. Here are the main points:
- Key Responsibilities: Solicitors must avoid acting in situations where there is a conflict of interest between clients unless an exception applies. Informed consent and effective safeguards are crucial when exceptions apply. Solicitors must never act if there is a conflict between their own interests and those of their clients. Examples include situations where solicitors might benefit personally.
- Identifying Conflicts: Regular conflict checks should be conducted before taking on new matters. This should be part of a firm’s systems and controls and include ongoing monitoring for potential conflicts as matters progress.
- Duties of Confidentiality and Disclosure: Solicitors have a duty to maintain confidentiality for all clients, including former clients, but must also disclose information material to a client’s case. This tension between competing obligations can create a conflict – the duty of confidentiality will always win.
- Managing Conflicts: When manageable conflicts arise within a firm, solicitors must ensure that proper information barriers are in place to protect confidential information. This can be challenging in smaller firms on a single site. In some cases, solicitors may limit their role to avoid conflicts, but clients must understand the implications of this, including any issues they will not receive advice on.
- Special Scenarios:
- Acting for Both Buyer and Seller: Solicitors must carefully assess whether acting for both parties in a transaction is feasible and document their reasoning. Confidentiality and disclosure duties should be considered closely in these cases.
- Lender and Borrower: Solicitors should not assume no conflict exists when acting for both lender and borrower, especially in non-standard loan agreements.
- Exceptions: Two exceptions allow solicitors to act in client conflict situations:
- 1. Substantially Common Interest: Clients must have a clear common purpose and a strong consensus on how to achieve it.
- 2. Competing for the Same Objective: This applies when clients are competing for an asset or business opportunity, and safeguards are in place to protect confidential information.
Solicitors must document any decisions to act in conflict situations and obtain informed consent from clients. Additionally, they should always keep these situations under review, as circumstances may change.
Compliance corner – real life Q&As
“Can I act for a UK citizen in a property transaction, where the acquisition is partly funded by a gift from parents based in Russia?”
This situation raises several compliance issues, particularly in the context of sanctions, anti-money laundering (AML) regulations, and source of funds verification.
Sanctions Considerations
The UK government has imposed various sanctions on Russian individuals and entities due to the ongoing geopolitical situation. You will need to ensure that the parents providing the gift are not subject to UK sanctions. If they are paying from a business, you will also need to sanctions check that entity. A thorough check using the UK sanctions list is essential, and any link to a sanctioned entity or individual could make the transaction unlawful without a specific licence.
AML Obligations
You are under a duty to comply with the Money Laundering Regulations 2017 and the Proceeds of Crime Act 2002. This means that you must carry out enhanced due diligence (EDD) on the source of the funds, especially given that the gift originates from Russia, a jurisdiction considered high-risk for money laundering. EDD would include obtaining detailed information about the parents, their financial situation, and the origin of the gifted funds.
Your firm’s policies and procedures should give you guidance on how to handle EDD. If in doubt, speak to the MLRO.
If this is a novel scenario for your firm, the senior management may need to update the firm-wide risk assessment as part of the compliance feedback loop.
Source of Funds Checks
You need to verify the legitimacy of the funds being used for the transaction. This is likely to involve obtaining bank statements, employment records, or any other documents that demonstrate the lawful source of the funds. Given the current tensions surrounding Russia, banks and other financial institutions might also scrutinise such transactions more closely, potentially causing delays.
So while acting for your client may be possible, it requires a robust compliance process. You must assess whether the gift falls within UK sanctions law, conduct thorough EDD, and verify the source of the funds to ensure you comply with both sanctions and AML regulations.
This is not legal advice. If you have a question you would like us to answer in this section, feel free to send it to info@jonathonbray.com
Free CPD
Recording | SRA AML fines: Lessons to be learned
In this session, attended by over 500 people, Harriet Holmes (Thirdfort) and Jonathan Bray discussed the SRA’s recent fines related to anti-money laundering compliance. The focus was on the lessons that solicitors and law firms can learn to avoid similar issues and improve their compliance procedures.
Key topics include:
- Overview of SRA AML Fines: The speakers outline the significant fines issued by the SRA this year and provide a context for why these fines are increasing.
- Common Compliance Failures: Real examples of where firms have fallen short, offering insight into recurring mistakes such as inadequate due diligence, improper risk assessments, and failure to properly identify clients.
- Best Practices: Practical advice is shared on how firms can strengthen their AML compliance systems, including staff training, maintaining up-to-date policies, and using technology effectively to monitor risks.
- Industry Impact: The discussion touches on the broader implications of these fines for law firms, with an emphasis on how firms can protect themselves and avoid costly penalties.
Training your team: Anti-money laundering update
The SRA expects that all ‘relevant employees’ practicing within the scope of the Money Laundering Regulations (MLRs) must receive robust anti-money laundering (AML) training. Now is the time to ensure your firm is compliant. Failure to meet these obligations can result in significant fines and regulatory action. Our comprehensive AML training is designed to equip your team with the knowledge and practical skills needed to identify, prevent, and report suspicious activities, safeguarding your firm from risk. Ensure your firm stays ahead of regulatory requirements and avoids potential pitfalls by enrolling your team today.
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SRA and SDT disciplinary decisions
- Robin Jacobs – Convicted rapist removed from legal profession.
- Matthew Miles – Solicitor rebuked for malicious communication conviction.
- Edell Jones & Lessers – Firm fined £3,711 for AML breaches (lack of compliant risk assessments and policy), about 2.1% of annual turnover.
- Nicholas Gittins – PI paralegal removed from the profession after being found to have misled his clients about the conduct of a claim.
- Karen Wishart – Family solicitor rebuked for delay in dealing with financial remedy proceedings, having been reported to the regulator by the other side’s solicitors.
- Paul Stephen Hirst – Solicitor rebuked for failing to pay client money (£300 in cash) into the client account for several weeks.
What we do – contact us for further information about our services
- Outsourced COLP and COFA support
- New firm and ABS applications
- Independent AML audits (Regulation 21)
- Training
- AML workshops
- PII services
- File reviews
