The latest review conducted by the Solicitors Regulation Authority (SRA) and published on 22 November 2021 concentrates on the role of the Money Laundering Compliance Officer (MLCO) and the Money Laundering Reporting Officer (MLRO) (together referred to as the AML Officers)1 within law firms.
The aim of this review was to assist the SRA to better understand the individuals who are appointed to undertake these roles, what challenges they face and what lessons can be learned. Doing so assists the SRA with producing effective guidance for managing this challenging risk, with a particular focus on the role of the MLRO as this role not only holds professional responsibilities but also personal liabilities should something go wrong.
Regulation 21 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 20172 (MLR 2017) deals with the appointment of the MLCO and MLRO.
Regulation 21(1) of the MLR 2017 provides firms must take into account the size and nature of the law firm when looking to appoint a MLCO. The nominated individual should hold a senior position of authority in the firm, whether it be a member of the board of directors, or equivalent.
The MLRO’s role is to investigate suspicious activity and to make suspicious activity reports (SARs) to the National Crime Agency (NCA) if they know or suspect, or have reasonable grounds for knowing or suspecting, that a person is engaged in money laundering. This role holds significant responsibility because the appointed individual can face personal criminal liability if they fail to make such a report which may result in imprisonment not exceeding five years, a fine or both3.
Both roles require a sufficient level of authority as difficult and unpopular decisions may have to be made around declining instructions which may appear to be lucrative to senior management. The nominated individuals may have to overrule senior members in respect of declining instructions, at the same time as ensuring compliance with the firm’s anti money laundering (AML) policies and procedures, which includes conducting client due diligence and undergoing training and must be adhered to by everyone including senior management.
More practical reasons for having a senior member of the firm holding these positions includes the fact that they will have intimate knowledge of the firm’s work and client base which will enable them to be alive to any matters that may give rise to a suspicion. They will have full access to the firm’s accounts which is important in order to gain an insight into the flow of money through the firm. Finally, a senior member of the firm as AML Officer will naturally be personally, professionally and financially invested in the firm, and they will want to protect it from the risk of reputational damage from being associated with money laundering.
The decision whether to appoint an individual to carry out both roles or appoint separate people is for the firm to make based on its structure and areas of expertise. From the review six of the 50 firms contacted by the SRA confirmed that they had appointed separate MLCOs and MLROs. The reasons for appointing separate officers was to ensure that there was a fair allocation of the work, there was a separate compliance function from the firm’s senior management. It was considered that the role of MLCO naturally sat beside the Compliance officer for Legal Practice (COLP) and provided a wider platform for a larger number of fee earners to raise queries and concerns.
The SRA recognise that for law firms to be successful in combating the threat from money laundering which they refer to as the “Three Pillars of Success”, AML Officers should have the following attributes:-
During April to September 2021 the SRA contacted 50 law firms who were in scope of the Money Laundering Regulations (the Regulations). The AML Officers of these firms were invited to complete a questionnaire and 25 law firms were subsequently selected to conduct an in depth review. 30 AML Officers were interviewed by the SRA about their roles.
Three key attributes which were identified during the review which were deemed essential to the work of an AML Officer using the Three Pillars of Success were:
Of the 54 AML Officers who were initially surveyed by the SRA:
Under the pillar of Authority the SRA identified the following Good Practices:-
Independence is a crucial attribute to ensure that AML Officers can make decisions objectively, without any business constraints and overrule opposition. AML Officers need to be able to speak up against any resistance from senior colleagues who may be looking more at profitability rather than money laundering risk. They also need to be able to challenge clients which may result in terminating long established and lucrative business relationships if necessary. More importantly for the MLROs, whose role holds a potential personal criminal liability if they fail to perform their duties correctly, they will need to have the necessary independence to determine when a SAR is to be summitted to the NCA and to implement any subsequent feedback if necessary.
Overall most firms said that by encouraging a compliance culture minimised encountering any resistance and this was credited by:
Firms that face resistance from clients to the AML measures found that by conducting client due diligence and collecting the necessary documentation and information at the outset of the instruction helps to minimise the risk of any push back and frustration from clients, especially when verifying the source of funds and wealth, which for some client feels obtrusive. Doing so will also reduce any delay in the transaction which is another area where clients become frustrated or annoyed and will want to know why this was not addressed sooner.
Eight of the AML Officers contacted confirmed that they did not have a fee earning role but 46 did have a caseload, and only 15 of those 46 received a reduction in their billing targets as a result.
Resources does not only mean financial resources but also having the support from colleagues. However, the biggest challenge the AML Officers faced in relation to resourcing was mainly down to having the necessary time to learn what is needed to fulfil the role, implement plans, assess progress as well as the time to reflect and react in the event of an emergency. Eight of the AML Officers contacted confirmed that they did not have a fee earning role but 46 did have a caseload, and only 15 of those 46 received a reduction in their billing targets as a result.
Interestingly the review identified that the majority of the AML Officers held other significant management roles including managing partner, COLP or Compliance Officer for Finance and Administration, Department Heads and other roles. On average the AML Officers contacted held three additional roles. It is recommended that firms assist their AML Officers by limiting the number of additional roles, reducing the fee earning and billing targets and appointing a deputy.
The issue of deputising the MLRO was discussed during the SRA review and whilst it is acknowledged that it is not a legislative or regulatory obligation, it is deemed good practice, in order to provide cover in the event of the MLRO being absent due to annual leave or illness. By appointing a deputy will ensure reporting obligations continue to be met and can reinforce support and guidance within the law firm as well as act as a second pair of eyes. The study identified that 28 AML Officers contacted did not have a deputy and six of those said that it was not necessary as they were always contactable even when on annual leave. This was considered to be short sighted, especially in light of the current climate, particularly if an individual was serious ill and unable to access emails or take telephone calls. In the case of being on annual leave securely accessing confidential information and documentation to make important decisions, or to make a SAR to the NCA may not be practicably possible due to poor internet connection and different time zones. Equally concerning is the well being of the individual. Whilst it is appreciated during the study that sole practitioners do not have the luxury of having a deputy it was recognised that they can manage their workload to limit the need of being disturbed when on annual leave.
In addition to the “Three Pillars of Success” training was discussed during the SRA review. Whilst there is no explicit requirement for AML Officers to undertake training over and above the rest of the firm, it is expected that that they should have a wider scope of knowledge.
Overall, the AML Officers contacted undertook annual training using a wide range of mediums including webinars, other forms of online training, specialist conference and roundtable discussions and workshops with peers and specialist articles and publications. The MLCO have overall responsibility for ensuring all relevant employees are trained in accordance with Regulation 24 of the MLR 2017, and are aware of the law relating to money laundering, and know how to recognise and deal with transactions and other activities or situations which may be related to money laundering or terrorist financing. Furthermore, the training must take into account of the law firm’s size and nature of business and extent to money laundering risk.
The SRA review recognised that the AML Officers roles are challenging. Overall, they found those individuals contacted wanted to protect their firms, staff and themselves from being involved in money laundering and terrorist financing.
Two of the “Three Pillars of Success” tended to be fulfilled which were Authority and Independence. However, the biggest challenged faced by AML Officers related to Resources, which is the third pillar, particularly in respect of having the sufficient time to dedicate to their role.
Firms should carefully consider whether their AML Officers are overloaded with a view to reducing their caseload and billing targets if fee earning. AML Officers should review the additional roles they hold within the firm to assess whether these roles could be delegated to colleagues, they are also encouraged to appoint a deputy. Doing so will enable them to focus on their role to ensure a robust compliance regime is embedded in their firms to minimise money laundering risk.
1 Solicitors Regulation Authority. (2021). Money Laundering Governance: Three Pillars of Success. Retrieved from https://www.sra.org.uk/sra/how-we-work/reports/money-laundering-governance-three-pillars-of-success/
2 http://www.legislation.gov.uk/uksi/2017/692/made
3 Section 334 of the Proceeds of Crime Act 2002: https://www.legislation.gov.uk/ukpga/2002/29/section/334#:~:text=334%20Penalties&text=to
%20both%2C%20or-,(b)on%20conviction%20on%20indictment%2C%20
to%20imprisonment%20for%20a,5%20on%20the%20standard%20scale.%5D
