We have recently seen the Solicitors Regulation Authority fining law firms across England and Wales due to a perceived lack of proper anti-money laundering (AML) policies and procedures. There are some in the legal sector that wave these stories off as purely anecdotal and not evidence of a system wide shake by the SRA and the Law Society. They claim that any shake-up won't happen because the AML and ID verification compliance for opening and running a legal matter is only a small part, albeit an important part, but nevertheless insignificant and simply a "tick box exercise".
Some legal compliance experts, agree that change in our AML system is well overdue, because it is clearly lagging other industries, for example the financial sector and the fintechs. However, they will then caveat this assertion that any change in AML compliance for lawyers will take time, and possibly years, because there is very little appetite in the legal sector to do things differently.
But I believe differently. I think that beyond the anecdotal articles that you read in the Law Gazette or the Legal Futures, there is now a “systematic trend” towards increasing the metaphorical bar on AML and ID verification quality, and this trend is being pushed by two forces. The first is by legal institutions, including the SRA, HM Land Registry and the Law Society, and the second, which I think is even more important, is by “legal technology providers” realising that there is a business opportunity for innovation in digital compliance and AML/ID verification technology.
But before we jump into the "meat" of my argument, let's go over the basics, what is money laundering and why are we must be so "anti"? Money laundering is process where individuals or companies make large amounts of money through illegitimate means (trafficking, terrorism, etc) and then try to "launder" this money to make it seem clean and legitimate rather than "dirty". The role of AML procedures is to try to identify these situations and stop dirty money flows before it is used to buy property or invest in businesses, thus making it harder to find and link back to the original illegal activity. Therefore, lawyers are at the forefront of AML as for most activities where money is laundered, a lawyer (or a conveyancer) will be required at some point.
So, this naturally then leads onto why there is a clamp down on law firms which do not have AML and ID verification policies and procedures in place. The National Crime Agency estimates that a total of £12 billion is generated through money laundering activities and in 2019 (which seems like an age ago) and the SRA invested in a dedicated team to oversee and support firms who either fall short of proper AML governance or need extra support to understand what they can do to enhance their policies. Since this team has been set-up and the commitment to a higher quality of AML and ID verifications made, the SRA has been fining law firms left, right and centre to prove that it is very much out with the old and in with the new.
Let's go back to 2017 and the release of The Money Laundering, Terrorist Financing and Transfer of Funds Information on the Payer) Regulations 2017. This regulation added a new dimension to legal practices requiring them to introduce “practice-wide risk assessments” forcing a more risk-based approach to clients, both individuals and corporations. The aim of this was to encourage solicitors firms to identify potential risk upfront and to understand the true nature of their source of funds, so ensuring that any ill-gotten money is identified right away. 2017 was only 4 (soon to be 5) years ago, but if you ask any law firm whether they have a firm wide risk assessment, and most will say they do. Why? Because the authorities (the SRA included) were not willing to allow law firms to set their own minimum standard for reviewing risk.
But the above was only the first step in this clamp down on AML in legal. Fast forward to 2021 and another well-known institute, Her Majesty's Land Registry, the keeper of record on all thing Land released their own digital standard on AML and ID verification compliance. The Land Registry’s "Digital ID Standard" introduced a "Safe Harbour" status for all property lawyers and conveyancers who followed the steps laid out in the guidance. The goal for the Land Registry is to ensure proper checks on the ID of a client and that the sources of funds are properly identified full compliance. This policy from HM Land Registry also highlights how the legal sector should expect AML regulations and compliance to transform over the coming years.
What's interesting is that this, what I call "institutional pressure", is leading to market forces also playing their bit in raising the standards in AML technology. Now to confirm, there have been several electronic ID verification systems in the market for many years. But these "dinosaurs" are no better than eye-balling a client in person and taking their word on where their money has come from. No, what we're seeing is the development innovative systems, such as Verify 365, which truly verify individuals using biometrics, and connect directly to their finances, offering lawyers level of financial detail and compliance they have never had before. There are some within the legal sector itself that decry data security and sensitivity, yet when you ask, how they verify clients they will say through scanned documents sent to them by clients through emails. This is not AML compliant. And it doesn't take an IT-whizz to hack such insecure emails and obtain client information. So surely a system which has rigorous security measures and where the data never leaves the system during the whole verification process is the way forward.These new AML platforms see opportunity from law firms not yet caught up with the new AML regulations or those finding it hard to make sense of it and catch up. So, the tech providers are adding pressure and help to implement the new standards set out. So currently we have this almost “symbiotic relationship” between institutions like the SRA, Law Society and Land Registry with private legal technology enterprises like Lawtech 365 in pushing this clamp down on poor AML practices in law firms.
So, what’s next? No money laundering activity at all in legal? Well, yes, ideally, but as our technology systems and regulation procedures get more robust and smarter so to do fraudsters. So, the end result is to combine technology, train lawyers and implement procedures to make it harder to launder money. Only through tougher sanctions and tighter systems will law firms move to a place where the SRA will not have to fine them for lax policies and procedures but instead applaud them for being at the forefront of AML compliance.