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Joined Up Compliance: Considering Forthcoming Legal and Regulatory Challenges
Joined Up Compliance: Considering Forthcoming Legal and Regulatory Challenges
It’s important to remember that law firm compliance requires a consideration of both legal and regulatory standards and that these often overlap.
Whilst we are waiting for the SRA to publish further consultations on regulatory policy changes and their review of the Handbook, law-based matters will keep compliance practitioners busy this summer. We are of course talking about the changes in anti-money laundering related legislation which no one in a compliance role, whatever specific title or function they hold, can ignore. Not only does the legal/regulatory overlap become explicit with the COLP’s oversight of compliance with the law but quite often conversations about AML provoke cross references with the SRA Accounts Rules and the COFA function to ensure that client money is safe.
These topics are of great concern to the SRA who have them in mind when considering their own risk management priorities. When things go wrong in terms of a solicitor’s or law firm’s response, then the regulator takes speedy action. A recent case which illustrates this point is the disciplinary ruling made against Clyde and Co, and published in April, in respect of breaches of AML duties and the SRA Accounts Rules.
In a nutshell, the firm has been fined £50,000 and three partners have been fined £10,000 each in respect of incidents dating back to 2013. The issues were as follows: the client account had been used for banking purposes in circumstances when there was no underlying legal transaction; the firm had failed to comply with client due diligence procedures in the Money Laundering Regulations 2007; had failed to take account of Law Society warning notices on money laundering and fraudulent financial arrangements; and had not dealt with aged residual balances holding more than £7million in client account on dormant matters.
In my experience, misunderstandings about rule 14.5 of the SRA Accounts Rules and what constitutes a banking service, and a lack of recognition of the seriousness of system failures which are associated with the holding of residual monies, is not unusual. We are on notice, however, that the regulator does not treat either issue lightly and expects firms to demonstrate that there is appropriate risk awareness and risk management systems in operation.
Keeping client money safe has a strong overlap with AML risks and merits conversations between the COLP, COFA and MLRO to achieve a joined-up compliance response. Why not consider some holistic training based on raising awareness of the risks associated with these topics and a consideration of both AML and the SRA Handbook repercussions? I have recommended to several my clients that they consider the benefits of tackling client money awareness with some Accounts Rules training for relevant people in the firm, by which I mean not just the managers and accounts staff, but everyone who has a role in keeping client money safe. It is essential that everyone understands what client money is, how and where it should be protected, timekeeping (for the time being at least), the risks attached to providing banking services, the issues with dormant matters and the holding of residual funds.
As a matter of urgency, the entire compliance function also needs to be considering the near final version of the Money Laundering Regulations 2017. I say near final because we are still looking at consultation proposals, but since the Regulations must become national law by 26 June, I doubt that we will see any changes of a radical nature. This means that we are looking at yet more risk management and, something with which compliance practitioners should be familiar, the requirement to have demonstrable evidence of this both at firm wide and at individual client level. Again, this will trigger the need for training.
The current headline changes include the need for enhanced firm and individual risk assessments, changes to simplified and enhanced due diligence, the extension of the PEP regime to domestic individuals, screening of relevant employees, the appointment of a board level officer responsible for compliance, new data protection duties, and training on money laundering, terrorist financing and data protection. In addition to all of this, the Criminal Finances Act must also be monitored for the firm wide implications of proposed tax evasion and professional enabler offences.
All-in-all, it continues to be a busy time for compliance practitioners who need to be evaluating the changing landscape and their firm’s response. Now is the time to coordinate a firm-wide action plan to avoid breaking the law or upsetting the SRA. This is a conversation for all compliance practitioners regardless of their specific titles.
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