SRA AML Thematic Reviews 2019 by Trevor Hellawell

Introduction

 

The SRA is currently conducting the second of its 2 thematic reviews for 2019. It has called for copies of 400 law firms’ risk assessments to assess the extent to which firms are integrating the more-detailed requirements of the 2017 Anti-Money Laundering Regulations.

 

This follows their first review, reported on in May 2019, into trust and company service providers (TCSP) – a survey of 59 firms only but indicative, nonetheless.

 

That published review identified a number of stark features:

  • 26 of the 59 firms were referred for disciplinary action (though not for actual money laundering, but for sloppy breaches of the Regulations)
  • 4 firms had no risk assessment at all
  • 24 firms had inadequate risk assessments
  • 20 firms had not specifically addressed TCSP work in their risk assessments
  • 14 firms had no or inadequate file-related risk assessments
  • 21 firms were unable adequately to demonstrate that ongoing monitoring was undertaken
  • 14 firms had inadequate PEP processes in place
  • 17 firms failed to provide training about TCSP work
  • Only 10 firms had submitted SARs in the last 12 months.

Points to emerge

 

The pointers for us all to take away from this interim review are

 

1..

..that we ALL need to revamp our written firm-wide risk assessments to encompass all the factors mentioned in the Regulations, as well as the wider issues revealed by the Treasury Risk Assessment published in October 2017 and further guidance from the SRA thereunder.

 

The Treasury Risk Assessment, inter alia, proscribed 6 levels of badness, of which the second was ‘unwittingness’, and the view was that most professionals fall into this band of oblivion. We are too busy getting on with the job to stand back an inch or two and adequately assess

  • the circumstances of the client – including a knowledge of their source of wealth and, more specifically, the source of funds for the transaction
  • the surrounding instructional context
  • other parties or jurisdictions involved

..in order to assess the real risks of fraud, tax evasion, corruption, bribery or money laundering actually taking place.

 

They suggest that we should all up our game and enter the top category of ‘vigilance at all times’. If we are asking the right questions of the right people at all stages of the matter, the risks are much reduced. This is ongoing monitoring writ large. If despite our questioning, we are satisfied of the bona fides of the client, we can proceed; if not, we should be discussing it with our MLRO/MLCO and making a suspicious activity report to the NCA.

 

2..

..we also need to review our PEP processes. Since Politically-Exposed Persons were redefined in 2017 to include domestic characters, as well as foreign, the possibility of acting for a PEP, a family member or a business associate of a PEP is much increased.

 

I used to say (in reliance on the old Law Society Practice Note) that we should simply ask all clients ‘are you a PEP’, taking their response at face value thereafter. I even drafted a short questionnaire for clients to complete in satisfaction of this duty.

 

The Review suggests that this is inadequate, and that some sort of objective search or enquiry (beyond the Google option) would be required. Most firms of my acquaintance use some sort of e-search facility to vet all their clients in the first instance, and this has the virtue not only of picking up whether the client is or is not a PEP but also such matters as Sanctions List membership and other tricky points.

 

Having identified a PEP, it is then for us to decide what enhanced steps we need to take for each type. This is another weakness highlighted by the Review.

 

3..

..further, we need to review our procedures for identifying companies, their managers and their owners.

 

The 2017 Regulations appear to say that in addition to verifying the identity of the entity (by a company search), a firm must also

  • obtain and verify the names of the board of directors or anyone involved in senior management
  • identify the beneficial owners of the company (owners of more than 25% of the shares, or otherwise exercising control), and take reasonable steps to verify them so that the firm can be happy that it ‘knows’ the identity of the beneficial owner
  • obtain and verify the identity of anyone instructing the firm on behalf of the corporation or entity
  • ascertain their authority to instruct the firm on the company’s behalf.

The old approach of verifying the identity of two of the directors seems now to be discredited.

 

4..

..and we also need to have an MLCO (in addition to an MLRO) in any firm which is bigger than a one-man band. This is expressed to be optional in the Regulations, but the Review takes a harder line.

 

There is much to attend to if we are to keep ahead of the Regulators in the future.

 

Trevor Hellawelltrevor-hellawell 

Solicitor

ExL Practice Development

07850 56 26 99

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