With so much change on the horizon we thought that it would be a good time to outline several key areas that you should avoid when dealing with Money Laundering compliance.

1. Your Policies, Controls and Procedures should be fit for purpose, current and relevant. Although the SRA do have some suggested templates available on their website, you should really think about the Money Laundering risks that apply to your business. Your Policy documents should be updated at ‘regular’ intervals and make reference to the most recent legislation and guidance notes. The SRA recently imposed a £20,000 fine on a firm for failing to have Money Laundering systems in place. Interesting to note, the SRA did not actually find evidence of any money laundering taking place.
2. Don’t be afraid to challenge what your client is telling you. One running theme that we come across is where a firm will accept a client’s instructions as they have a long-standing relationship with them. Yes, this does mitigate the risk but does not completely eradicate it. For example, if your client is a corporate entity and has had a recent change in ownership, which you have not recorded on file, new individuals would have come into the business. Do they need to be formally onboarded?
3. Do not presume that delivering training to your staff when they join the firm is sufficient to meet the requirements. Money Laundering is an ever-changing landscape, and the risks around this will continue to develop. We have already seen the implications of the Russian invasion of Ukraine. Cryptocurrency is another emerging risk that the regulators have identified. You will therefore need to ensure that refresher training to all staff is delivered on a regular basis (once a year would work).
4. Clients provide you with statements to confirm that the money is sitting in a bank account. Problem solved then? No. Don’t assume that the bank has carried out sufficient checks against that money. Again, the risk is mitigated but not eradicated. Even UK banks have been levied with fines for Money Laundering failures. Look at the matter as a whole to see if the pieces of the jigsaw fit. Electronic verification providers are useful here.
5. Don’t think that ticking boxes on your client and matter risk assessments is enough. It’s not. When, and not if, the SRA come in to carry out an Audit of your Money Laundering controls they will pick up a file and want to see evidence of how you have come to risk assess a matter. Narratives are good, they tell a story.
6. Don’t assume that your firm does not require an independent audit of its Money Laundering controls. Otherwise known as a Regulation 21 Audit. It probably does, and you will have to demonstrate pretty cogent reasons to the SRA for not carrying one out. Oh yes, make sure it’s ‘independent’ as you can’t be seen to be marking your own homework.

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Our key learnings:

1. Standing still is not an option. Whether its SRA regulation, your people, processes, technology or even global world events, law firms must learn to adapt and embrace change. The hybrid working model was something that the legal profession didn’t truly embrace before 2020 but, as we saw, evolution and not revolution was the key. Your staff are now expecting a greater work life balance. If you want to attract and retain talent, be prepared to innovate otherwise there is a real danger that you could get left behind.
2. Your people are your biggest asset. Be prepared to bring them on the journey, encourage and empower, invest in their self-development and support them when things are not going to plan. A recent SRA Workplace Culture Thematic Review concluded that a positive workplace culture is intrinsically linked to effective risk management and avoiding regulatory breaches. Supporting your staff could have real tangible benefits.
3. You need to make time for compliance. A common theme that we have come across is that although senior leaders are keen to adopt an effective culture of compliance, making time to implement is a big challenge. This will not go down well with the regulator if they investigated you. So put some time aside in your calendar every week to review and reflect on where you are, where you want to be and what needs to be done. The SRA even suggested, in a recent review, that sharing central compliance roles across senior leaders is recommended.
4. Money Laundering is the biggest risk to the profession. The SRA now seem to provide almost weekly advice and guidance in this area. They have also announced that additional resource will be allocated to their internal supervision teams and will be increasing engagement with firms. Don’t wait for that email, get your house in order now.
5. If things do go wrong, don’t panic. There have been numerous reported cases of junior solicitors backdating documents or forging signatures on forms, which have resulted in strike offs by the Solicitors Disciplinary Tribunal. Have an open-door policy with your staff and encourage them to raise issues as soon as they become apparent.

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With the recent increase in law firms looking to work with compliance consultants, we look at why businesses outsource some of their regulatory duties.

1. As compliance consultants live, sleep and breathe risk management, they could be in a better place to anticipate when things are about to go wrong. This could save you cost, time and even the wrath of an SRA investigation. To demonstrate, the SRA recently contacted a firm for sight of their AML Firm Wide Risk Assessment, which they didn’t have in place even though this has been a requirement since 2017. No doubt, the SRA weren’t impressed which resulted in regulatory action. The firm then contacted us and we worked with them to address the issues that had been raised. Had the firm worked with us earlier, we would have picked up the absence of the AML Firm Wide Risk Assessment and put one in place.
2. On your professional indemnity insurance renewal, a declaration that you work with a compliance consultant could reduce your premium. Underwriters like to see that you are serious about compliance and don’t merely approach this as a ‘tick box.’
3. As time engaged on the compliance officer role cannot be billed to clients, your senior fee earners are being used for work that could be outsourced, at a competitive rate, which would free them up to generate fees for the firm.
4. Does your compliance officer have time to undertake the role? Were they voluntold to do it? Do they have the necessary experience and training? Is compliance always at the bottom of their to do list? Although these are the types of challenges that most businesses face on a daily basis, the SRA will not accept excuses if things go wrong.
5. Although compliance starts at the top, it should be embedded within the fabric of your firm. From our experience staff tend to engage in the process when they know that an external consultant is involved. In fact, they see us as part of the wider team!

If you would like some further information around outsourcing your compliance functions, contact us today.

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Know your structure

Traditionally only a solicitor was able to set up a law firm. However, the Legal Services Act 2007 opened up the market to non-lawyer management and ownership. You can now set up your business in a number of ways:

• Sole practitioner. Where a solicitor is the only manager and owner.
• Traditional partnership. Which would require at least two legally qualified individuals in the structure.
• Corporate entity (LLP or Limited Company). Accountants will tell you that this is a more tax efficient way of setting up your business. As the entity is a separate person, shareholders and directors are not liable for any debts incurred.
• Licensed body (ABS) through a corporate entity. This is where you have any type of non-lawyer management or ownership in the structure.

Research your market

Although new business failure rates for the first two years of operating are at around 30%, you will still need to consider how you intend to secure new instructions. If you have an existing book of clients, will your current employer allow you to take these with you? Does your contract have any covenants or non-poaching clauses that restrict you from contacting current clients? You will need to think about how you intend to market your business as the SRA will not allow you to make direct unsolicited approaches or cold call potential clients. Generating new business will be a key challenge for you.

Business Plan and Financials

Preparing a robust business plan will help you map out your journey and give the opportunity to self-reflect. Your business plan should address the key risks to your proposal and contain a Strengths, Weakness, Opportunities and Threats analysis. By doing this, you are already putting in place measures to address the challenges that your business will face when it begins operating.

Instruct an accountant to help out with your financial forecast and be conservative with your figures. The SRA will require a forecast for the first three years.

Professional Indemnity Insurance

As part of your application to the SRA, a valid insurance quotation will be required. With the exception of the ‘traditional’ structures, the minimum level of cover required is £3m. You can only obtain your quotation from the SRA list of Participating Insurers for the current indemnity period. Based on your projected turnover for year one, expect to pay a premium of between 5% – 7.5%. As part of the proposal, your broker will also require a comprehensive business plan and financial forecast.

From our experience, obtaining a valid insurance quotation is often the biggest delay encountered at this stage of the process. You will need to factor this into your timetable for approval.

Prepare and submit your application

Once you have your core documents ready (structure, business plan, financial forecast and insurance quotation) you will need to complete the SRA application forms. Depending on the type of structure and work areas, these will involve a combination of a form for the entity, role holders, financial services and money laundering approvals. All submitted forms will require declarations from your lawyer manager (any false declarations could be deemed dishonest) and, once the application pack is ready, submission can be made via your MySRA account. If the SRA require additional information, they will raise these issues with you as part of the decision making process.

Your business proposition will require a considerable degree of thought and planning. If you would like some assistance with the process of setting up your own law firm, we can help.

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The 5MLD applies to all firms whose work areas currently fall within the scope of the MLR. It is not as big a change as the previous overhaul in 2017.

Main changes that will be most relevant to solicitors and law firms are outlined below:

1. Additional due diligence requirements when dealing with high risk jurisdictions, including what is known as ‘super-enhanced due diligence.’
2. Reliable electronic verification systems are now explicitly permitted to be used in customer due diligence.
3. More certainty over Politically Exposed Persons (‘PEP’). The government is required to give the profession information about the PEP worthy roles and positions.
4. Increasing transparency in beneficial ownership through expansion of the registration requirements for companies and trusts, and the availability for their inspection. This will include an obligation on solicitors to notify Companies House of any discrepancies between the official persons of significant control register and the information held by a firm.
5. The legislation also means the SRA are changing some of their processes. For example, new applications for Beneficial Owners, Officer and Managers (known as BOOMs) will now need to provide a basic Disclosure and Barring Service check which shows applicants do not have any of the criminal convictions that would prevent approval.

The Regulatory Position

Although the SRA previously indicated that they would take enforcement action against any firms who did not comply with the 5MLD, they have now changed their stance and will take the limited time that firms have had to prepare for the new requirements into account when carrying out enforcement work. The Legal Sector Affinity Group is also currently drafting updated guidance on the 5MLD, which will then have to be approved by the Treasury. This may take a number of months to implement.

What should your firm be doing about the 5MLD?

We have outlined some practical tips that you can implement now:

1. Your firm should review its current anti-money laundering policy and risk assessment so that any of the new changes are recorded in these policies.
2. Revised copies of the polices should be circulated to members of staff.
3. How are you monitoring compliance? Are fee earner file reviews identifying any major issues?
4. Consider refresher training for your staff.
5. Keep an eye on further guidance that may be published by The Legal Sector Affinity Group as this may trigger another review of your policies and procedures.

If your firm requires support in implementing any of the above please contact us today.

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