Combatting money laundering: A Legal Services perspective

The world is facing volatility and uncertainty not experienced for many decades, from geopolitical and economic factors. As countries contend with these challenges, economic crime has risen to a new prominence and is an increasingly complex and growing risk. Economic crime in the UK is seen as a multi-billion-pound problem. Alarmingly the true value is unknown and regardless of the figures involved, what is apparent is that economic crime is a significant issue that is not diminishing, and which undermines good governance and tarnishes the reputation of the UK financial systems.

Significant progress has been made to specifically combat economic crime, such as the establishment of new government bodies including the National Economic Crime Centre and the Office for the Professional Body Anti-Money Laundering Supervision. Despite the enforcement of new economic crime legislation^[1] and new powers afforded to law enforcement such as strengthening the unexplained wealth orders and freezing orders regime and the reformation of Companies House, the level of economic crime continues to rise.

We explored the economic crime climate during our conference held at our London office in June 2023. Whilst there is not a definitive definition of economic crime it does refer to improper activity involving money, finance and assets and encapsulates the various crimes that include:

• corruption
• cybercrime
• fraud
• money laundering
• sanctions
• tax evasion

The Economic Crime Plan 2 published in March 2023^[2] (ECP2) sets out how the UK Government intends to fight economic crime and make the UK a hostile environment for those wanting to launder their proceeds of crime. Money laundering is the lifeblood of organised criminals, who enjoy the proceeds from their illicit activities. One of the aims of the ECP2 is to crack down on money laundering and deny criminals access to their proceeds of crimes to fund further criminal activity.

The role that the legal profession plays in preventing money laundering is key as lawyers are seen as one of the gatekeepers to the UK’s financial systems, protecting them from dirty money. However, some may argue that the increased legislative and regulatory obligations being placed on the profession to prevent the threat of money laundering is ever increasing and to some may feel burdensome, especially with the additional geopolitical and economic pressures and the enforcement of the latest Economic Crime and Corporate Transparency Act 2023^[3].

There is concern that legal services are open to being exploited by criminals and lawyers may unwittingly be professionally enabling money laundering. The ECP2 has defined a professional enabler as:

The issue of the anti-money laundering (AML) regulatory burden has been addressed by the Solicitors Regulation Authority (SRA). The most common request for assistance received by the SRA is for help reducing the level of regulation currently being imposed on the profession^[5].

Whilst the SRA accept the enormity of complying with the increased legislation to combat economic crime, the SRA’s Chief Executive, Paul Philips stated at the annual Law Society's Risk and Compliance Conference held in March 2023, that the pressure the SRA is facing from the UK Government to tackle the threats from economic crime is ‘colossal’. In the current climate it does seem that there is little that can be done to limit the regulatory requirements coming from direct legislation^[5].

Law firms are reminded of their obligations to comply with the Code of Conduct for Solicitors, RELs and RFLs and the Code of Conduct for Firms where applicable, regarding the increased legislation:

• Paragraph 7.1 of the Code of Conduct for Solicitors, RELs and RFLs: keep up to date with and follow the law and regulation governing the way you work, ensuring compliance with your legal obligations under the Proceeds of Crime Act 2002, the Terrorism Act 2000, and the money laundering regulations.

• Paragraph 2.1(a) of the Code of Conduct for Firms: compliance with all SRA regulatory arrangements as well as other regulatory and legislative requirements. Firms must ensure compliance with the requirements of the money laundering regulations and monitor compliance with the money laundering regulations.

Levels of fines have increased for AML failures with both financial and reputational consequences. In January 2023 the SRA used its new fining powers and imposed a £20,000 penalty on a law firm for inadequate AML training and internal policies, controls, and procedures^[6].

The SRA has recently issued a warning notice about the importance of conducting client and matter risk assessments^[7]. The latest round of inspections carried out by the regulator, identified a persistent level of non-compliant client and/or matter risk assessments. This is an area requiring improvement. Areas of concern include:

• client and/or matter risk assessments not being carried out at all, or not being correctly used or reflecting the risks identified in the firm wide risk assessment.
• over-reliance on template risk assessments not tailored to the firm.
• failing to clearly indicate when enhanced due diligence was necessary.

The purpose of risk assessments is to determine the level of client due diligence required, taking into consideration high risk factors, such as high-risk jurisdictions, politically exposed persons and transactions that are complex or unusually large. If a matter is assessed as high risk, then enhanced due diligence procedures must be satisfied, including ongoing monitoring. Client risk assessments should be conducted at the commencement of the business relationship, and matter risk assessments are matter specific and conducted as early as possible when instructed on a new transaction for a client.

Verifying the source of client funds is an also an area where the profession is falling short. Understanding the source of a client’s funds is an integral component of the client due diligence process. The aim is to protect the law firm from being exploited by those looking to launder proceeds of crime.

Inadequacies have been identified around the verification of the source of funds in all thematic reviews undertaken by the SRA, whether it be a failure to physically conduct the appropriate checks, and if the checks were conducted, ensuring that there is suitable documentary evidence to support such action has been retained on the file.

When considering the source of funds information, it should be consistent with the law firm’s understanding of their client’s risk profile and nature of the business and instruction. Firms are advised by the SRA to ‘go back as far as is needed’ to build a clear picture of how clients accumulated the money needed for their transaction^[8]. The SRA consider identifying the source of a client’s funds as one of the most valuable checks law firms can do to protect themselves from the risk of money laundering^[9] .

It is essential that law firms know who their clients are and understand where the money being used to fund their transaction is coming from. Erroneously, economic crime, in particular money laundering is perceived as a victimless crime – this is far from the truth as such crimes fund drug and human trafficking, forced prostitution, child exploitation and more.

Money laundering is estimated to cost the UK economy more than £100 billion each year^[10]. Criminals are increasingly turning to the trafficking of humans and the smuggling of migrants, and the money generated by such lucrative activities finds its way into the financial systems, often through the creation of companies or the purchase of property.

The human cost of economic crime is a very real and a global challenge. It is the proceeds from these criminal activities that are laundered through our financial systems and used to fund further criminality which can often be overlooked by law firms when focusing on complying with their AML legislative and regulatory obligations.