Regulation 18 of the Money Laundering Regulations 2017 requires all law firms (subject to the Regulations) to have in place an AML firm-wide risk assessment.
The official anti-money laundering guidance for the legal sector describes this high level risk assessment as the ‘cornerstone’ of anti-money laundering compliance. Not only does it demonstrate that you have been through the required analysis, but it informs all of your firm’s policies, procedures and controls.
And since it needs senior management sign-off, it is an essential part of establishing an AML culture.
The SRA puts a huge emphasis on the importance of the firm-wide risk assessment. It is the first document they will want to see when they spot check your firm.
But what exactly needs to be in the AML firm-wide risk assessment?
The precise requirements can be found in:
- Sectoral Risk Assessment – Anti-money laundering and terrorist financing (24 July 2023)
- Legal Sector Affinity Group (LSAG) – Anti-money laundering guidance for the legal sector
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
We have summarised main points in this PDF checklist – download here.
When considering the source of funds, we should address every aspect of what the client is contributing and leave nothing unexplained. The same can be said for other third parties who may be contributing.
£17 billion is gifted or loaned informally each year, almost all from parents to their adult children. This mostly helps with buying a house or is gifted at the point of marriage… Half the value of gifts received is reported as used for property purchase or improvement. Those using transfers for this purpose received over £20,000, on average, according to the Institute for Fiscal Studies (IFS).
We must go beyond proof of funds: Money in a UK bank account is insufficient in itself. It addresses where the money is (proof of funds) but not where it ultimately comes from (source of funds).
We should not solely rely on self-declaration from either clients or donors. Where possible, independent evidence should be obtained. Giftors, including “the Bank of Mum and Dad”, should be subject to the same level of scrutiny as any other client.
Jonathon Bray spoke to Harriet Holmes, AML Services Manager at Thirdfort, to explain why.
ICYMI: Why A Solicitor’s Client Account Cannot Be Used As A ‘Banking Facility’ – And How To Stay Safe
All solicitors know that compliance with the SRA Accounts Rules is central to keeping on the right side of regulation. Keeping client money safe is a fundamental part of being a trusted regulated professional.
Having the ability to hold client funds in a client account enables solicitors to facilitate transactions. But SRA-regulated law firms must never offer pure ‘banking facilities’ through their client account.
In this post, we look at what a ‘banking facility’ actually means, why the SRA cares and what to look out for.
See below for a link to our webinar on the topic.
News and Guidance
- Thematic Review: The use of Non Disclosure Agreements in workplace complaints – Particularly relevant to employment lawyers, this research paper follows from the SRA’s concern that solicitors are involved in suppressing employees’ claims of inappropriate behaviour and sexual misconduct. For further context, see the related SRA warning notice. Although the report found ‘significant imbalances in power’ between the position of employers and employees when drafting settlements (perhaps not unexpected), of the 150 firms visited there was no evidence of solicitors helping clients suppress wrongdoing.
However, the report suggests that few firms provide specific training on the risks associated with NDAs. Further, the reliance on template agreements and clauses may encourage solicitors to overlook wrongdoing, concentrating instead on financial settlement negotiations and other terms of the agreement.
- AML questions and answers – The SRA beefs up its guidance on sanctions-checking counterparties:
“The degree of scrutiny of the counterparty…should be proportionate to the risks identified. As a basic measure, at the outset of the matter we advise you to check counterparties against the OFSI consolidated list, perhaps as part of your conflict checking procedure. Riskier counterparties and transactions should be subject to more in-depth due diligence and more regular ongoing monitoring.“
This is not new. Please see our previous post (What Exactly Is A ‘Proportionate But Risk Averse’ Approach To Sanctions Compliance?) which examines this topic.
- The professional indemnity insurance market for law firms – This research paper found that the most important factors driving PII premiums are the size of a firm and whether it undertakes property work. Small law firms and those practising conveyancing could expect to pay a much higher percentage of turnover as insurance premium. The median cost of PII is 5% of turnover. “All other things being equal, law firms doing 60% of their work in property would pay a 50% higher premium rate than a law firm doing 30% (which our data suggests is the median amount across all firms).”
Law Society Updates (may require login)
- Q&A: Is cyber insurance covered by professional indemnity insurance?
- Q&A: When acting on multiple retainers, can I rely on client care information I’ve already provided?
- Q&A: Can I administer a statutory declaration if I’m not currently working?
- Q&A: Can I see a copy of a complaint made to the Legal Ombudsman about my firm?
- Q&A: Do I need professional indemnity insurance if my employer is not SRA regulated?
- Q&A: Do we need to appoint an MLCO if we have an MLRO?
- Q&A: Do we need to carry out a DBS check on a newly hired solicitor?
- Q&A: Is cyber insurance covered by professional indemnity insurance?
- Q&A: I’m holding £1 million in my client account. How can I make sure the funds are protected?
- Q&A: I’m newly qualified. Can I become a freelance solicitor?
- Q&A: I’m setting up a new firm. What should we include in our client care letters?
- Q&A: My client is a member of a UK political party. Do they count as a politically exposed person?
- Q&A: The other side won’t explain how the costs my client must pay are calculated. What can I do?
- Q&A: What do we need to include in our policy on handling cash?
- Q&A: What does ‘adequate and appropriate’ insurance mean for a freelance solicitor?
- Q&A: What is the effect of a section 44B notice from the SRA?
- [Updated] Practice note: Outsourcing
- [Updated] Practice note: Disputed wills: guidance for practitioners
- [Updated] Practice note: Accredited legal representatives in the Court of Protection
- [Updated] Practice note: Statutory defences available to asylum seekers charged with document offences
- [Updated] Practice note: Information on letterheads, emails and websites
- [Updated] Practice note: Compliance officers (COLP and COFA)
- [Updated] Practice note: Conflict of interests
- [Updated] Practice note: Disclosure of tax avoidance schemes
- Legal Services Board (LSB) board paper – Part of the same research as the SRA research project on PII, this update reiterates that the LSB has concerns that the cost of insurance could indirectly impact client choice and the cost of legal services. Further research and policy work is in the pipeline.
Free webinars and recordings
Come along to our next lunchtime learning session on Wednesday 27th September 2023 at 12pm.
- Thinking of buying or selling a law firm?
- Want to learn about the latest PII market?
- What’s the solicitor recruitment market doing at the moment?
Join us for a conversation with industry experts who can answer your burning questions about the insurance market, attracting and retaining the best lawyers, and the law firm merger market.
Our expert panel includes:
- Gary Horswell, Managing Director of Ntegrity Insurance Solutions – a specialist in the solicitors PII market since the ‘open market’ began in 2000.
- Jonathan Fagan, Founder and Managing Director of Ten Percent Group – a specialist in locum & permanent solicitor recruitment, as well as law firm sales, mergers & acquisitions.
- Jeff Zindani, Founder and Managing Director of Acquira Professional Services – a leading M&A matchmaker and broker for law firms and legal tech companies.
Operating a client account can be an interesting business! Not only do you have increased money laundering and financial crime risks, you must also avoid acting like a financial institution.
Accounts Rule 3.3 states: “You must not use a client account to provide banking facilities to clients or third parties” …. and this can be quite tricky to navigate. Several solicitors have been fined and disciplined by the SRA under this rule.
But how do you avoid getting this wrong? What is a ‘banking facility’ and how does the SRA interpret the rule?
Fear not, we are here to help! In this webinar we looked at:
- The history of the ‘banking facility’ rule
- Why can we not act as a bank?
- SRA Guidance
- Disciplinary decisions relating to Accounts Rule 3.3
- Practical considerations for law firms
We were delighted to co-host this session with our friends at Thirdfort.
Unsurprisingly, we get asked many questions about source of funds, source of wealth, identification of clients, and the like. In the current world of regulation, we find many law firms are very nervous about ‘getting it wrong’ and want to ensure compliance.
In this webinar, our JBL team discussed some of these most common compliance queries with valuable input from Harriet Holmes of Thirdfort, including:
- Source of funds – how far do we need to go? How do I know I’m done?
- Source of funds – is the ‘Bank of Mum and Dad’ low risk?
- Source of wealth – can I take my client’s word for it?
- Risk assessment – do I need to do one at the start of every file?
- Ongoing monitoring – what should this look like in practice?
- Employee screening – we don’t DBS-check all our staff. Should we?
- Independent audit – how often does it need to be done?
- CDD – do I need to verify the identity of all the Directors of a client company?
- CDD – who do I need to verify in a trust?
SRA and SDT disciplinary decisions
- Neelash Mehta – struck off for concealing driving convictions from employers.
- Christopher Michael Haddock – struck off after taking a £25,000 loan from a client, putting him into a conflict situation, and then covering up the fact from the regulator.
- Matthew Hudson – rebuked for failing to undertake client account reconciliations and deliver an accountant’s report.
- Paul Formby – struck off for dishonestly altering witness statements to cover up mistakes, and committing his client to insolvency application costs without instructions.
- Glenn Charles Hurstfield – struck off for dishonestly purporting to amend an irrevocable declaration of trust, using the client account as a banking facility, and making unauthorised withdrawals from the client account.
- Morgan Wiseman Solicitors Limited – firm fined £2,500 for using the client account as a banking facility and making an improper transfer of sale proceeds to an unconnected third party in a high risk jurisdiction (UAE).
- Jagdeep Brar – rebuked for delay in complying with a wasted costs order against the solicitor personally.
- Andrew John Chatterton – fined £20,000 acting in a conflict of interest, where a vulnerable client’s attorneys sought to gain from property investments funded by the client. The client lost over £385,000 when the solicitor listed the client’s attorneys as tenants in common in the purchased properties.
- Jane Pleass – rebuked for recklessly failing to take any instructions from her terminally ill client in drafting his will. All communications went through the client’s partner. This breached the fundamental duty of acting in the client’s best interests and maintaining public trust and confidence.
- Mark Sinclair – non-lawyer Learning and Development Manager banned from the profession following three serious convictions. He failed to tell his employers.
- Aaliyah Lister – conveyancing paralegal banned for misleading a client by amending a letter referring to lost documentation.
- Nia John – non-lawyer banned for dishonestly deleting elements of a file to conceal a mistake, and issuing proceedings without client instructions.
- Andrew Warburton – non-lawyer personal injury adviser banned for misleading the court; failing to deal with directions on multiple occasions; and failing to tell his firm about costs orders.
- Graham Albert Waite – fined £5,250 for failing to have in place a compliant AML firm-wide risk assessment or policies and procedures, and providing inaccurate information to the regulator. The level of fines for these administrative AML breaches is creeping up.
- John Kelsall – rebuked for writing to clients on firm headed paper after the firm had closed.
- Mohammed Saleem – fined £7,750 for ‘selling’ property searches on an aborted transaction to another law firm, taking that money into his personal bank account.
- Mohammed Israr – fined £12,000 for acting for buyer and seller in five linked property transactions, failing to advise clients about the risks involved in selling property for no consideration, and failing to follow the firm’s policies on risk assessment and anti-money laundering. This was a fine direct from the SRA under its new increased powers. Previously, only the SDT could fine solicitors over £2,000.
- Kalvinder Garcha – struck off following fraud conviction.
- Mohammed Ullah – IT service desk employee banned for entering into correspondence with a Coroner in a personal matter, misrepresenting his employer’s involvement in the matter.
- Victoria Lennard – Office manager banned from the profession for dishonestly amending a document in a client file in order to change its meaning.
- Daniel Jackson – Receptionist banned for dishonestly amending a copy of his HR records sent to a travel company, in order to show he was authorised to take additional annual leave to self isolate on return from a holiday.
- Kirsten Von Wedel – struck off after being branded a ‘danger to the public’ by the SDT. Misconduct included sending threatening and abusive emails to a client, and several failings on conveyancing transactions.
- Gary Robert Williams – struck off for lying to a client’s litigation friend about the status of a pre-action protocol letter.
- Matthew Goldborough – struck off for instructing clients to pay legal fees to his personal account, and in some cases not undertaking any work.
- Prince Fomba Goba and Waqas Hassan – struck off for allowing over £170,000 to be paid to an unregistered barrister without client consent.
- Thomas Harland Cadman – fined £25,000 following convictions for sexual assault (unwanted touching in a pub).
- Diana Joan Marten – struck off for amending the date on a legal charge to cover up a missed filing deadline.