Keeping it clean

Anti-money laundering rules are a heavy burden on the legal profession but reform is coming

“The risk of abuse of legal services for money laundering purposes remains high overall. Legal service providers offer a wide range of services and the services most at risk of exploitation by criminals and corrupt elites for money laundering purposes continue to be conveyancing, trust and company services and client accounts.”

So says the UK’s current national risk assessment on money laundering and terrorist financing, published in 2020 (the risk in relation to terrorist financing was considered low, however). HM Treasury (HMT) and the Home Office are set to publish an updated version this year but it seems unlikely that they will downgrade their view of legal services.

As a result, anti-money laundering (AML) is a high priority for the profession’s regulators and thus a heavy burden on practitioners.

This was confirmed by the Economic Crime and Corporate Transparency Act 2023, which added a new specific regulatory objective to the Legal Services Act 2007 requiring regulators like CILEx Regulation Ltd (CRL) to actively promote the prevention and detection of economic crime.

Speaking during the bill’s passage through Parliament, the then security minister Tom Tugendhat said: “The crisis in Ukraine has highlighted that the sector is exposed to further-reaching risks, such as sanctions breaches. The bill therefore contains measures that strengthen the legal sector’s response to economic crime.

“Our legal sector is internationally renowned for its high standards of excellence and professional conduct. The vast majority of the sector is compliant with its economic crime duties. However, it is crucial that regulators have the right tools to effectively promote and monitor compliance.”

The new objective puts beyond doubt that it is the duty of the frontline regulators to carry out such regulatory action as is appropriate to uphold this objective. It also enables the Legal Services Board, as the oversight regulator, to performance manage frontline regulators against the objective.

Patchy compliance

Nonetheless, AML compliance at law firms is patchy. The Solicitors Regulation Authority’s (SRA) annual AML report for 2023-24 showed that only 22% of law firms checked for their approach to AML were fully compliant with the rules – 55% were partially compliant and 23% non-compliant.

This has led to a steady drumbeat over the last 18 months of the SRA fining law firms for non-compliance. These are not lawyers actively aiding money laundering; rather, they are simply not ensuring they have the defences in place as required by the 2017 Money Laundering Regulations (MLRs).

“The Solicitors Regulation Authority’s annual AML report for 2023-24 showed that only 22% of law firms checked for their approach to AML were fully compliant with the rules” 

The common failures are not having in place a firm-wide risk assessment, or policies, controls and procedures to mitigate and manage effectively the risks of money laundering, and not undertaking client and matter risk assessments.

CRL is another of those charged with monitoring compliance. In a sector assessment it published in October 2024, the regulator judged as low the money laundering risk for the relatively small number of firms it oversees.

This was in part because of the limited types of services they provide – largely probate and estate administration – and the clients they have, who tend to be individuals and met face to face; those with corporate clients generally only work with small businesses.

But CRL rated as ‘medium’ the risk around financial transactions because source of funds checks carried out by supervised firms “have broadly been found to be less than adequate”.

It explained: “Some firms have treated as low risk funds received through a high street bank and have not carried out their own checks to identify the true source of the funds and the clients’ source of wealth.” These checks are cornerstones of the AML regime.

CRL also noted that, whilst some firms maintain records of AML training – again, required under the rules – other firms did not. A detailed article from CRL on the most common AML failings can be found in this edition.  

Supervision shortcomings

The nine legal and 13 accountancy regulators across the UK – including CILEX/CRL – are themselves overseen by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), part of the Financial Conduct Authority.

Its role is to ensure robust, consistent supervision across these so-called professional body supervisors (PBSs), as well as good information sharing. But its most recent annual report, published in September 2024, said it was not seeing “the consistent, effective improvement we need”.

The regulators should be “demonstrably reducing the risk of illicit funds in the UK by taking increasingly proactive and effective interventions among their populations” – and to achieve this, many will have to do “much more to improve their current approach”.

The assessments showed no material improvement in PBSs’ effectiveness in the core areas of supervision, risk-based approach, enforcement, and information and intelligence sharing. “Not all PBSs are prioritising and resourcing their AML supervisory function appropriately,” OPBAS found, but its practice is not to name names publicly.

Overall, the accountancy sector PBSs assessed showed their supervision was better than the legal sector’s, but gaps remained “across the board”.

The legal sector did not have clear selection criteria for inspections or formalised supervisory cycles; one PBS had not classified any members of its supervised population as high risk, despite some providing trust and corporate services, which are designated as high risk.

“We also identified a PBS in the legal sector that considered the inherent risk of money laundering to be low in its supervised population and so did not provide regular AML training to its staff in specialist AML roles.”

There is unhappiness from the other end of the spectrum too. The Property Lawyers Alliance (formerly the Property Lawyers Action Group) recently began a campaign against the “mountain of red tape suffocating conveyancing”.

It said the “vast panoply” of AML guidance notes, laws, regulations and sanctions in conveyancing represented “a serious impediment to the efficient working of the UK property market”. It estimated that this all exceeded 1,500 pages in length.

“Property lawyers must acquire in-depth working knowledge of AML laws and regulations via extensive, regular training, which detracts from their core legal practice. They must also ensure their staff receive training. Property lawyers must devote significant amounts of their precious time to creating and updating written AML policies, procedures, and other mechanisms and verifying, recording, evaluating, and reporting on evidence gathered in compliance with AML controls.”

The PLA said there was “no remuneration” for this mandatory activity and, for small and medium law firms in particular, the burden of compliance was “crippling” and took up “a disproportionate share of a law firm’s resources”.

The Property Lawyers Alliance warns the mountain of red tape is suffocating conveyancing

Reform hope

But is hope at hand? In June, the government released its 10-year Industrial Strategy, which identified legal services as one of the areas it intended to prioritise. And the sector plan for professional and business services published alongside it recognised the importance of ensuring the MLRs were “clear and proportionate to the risks”.

Before the end of this year, it pledged, HMT would “bring forward a package of changes to the MLRs aimed at improving their effectiveness”.

It continued: “We also recognise the significant potential for new technology such as digital identity to streamline checks and processes for firms and customers. As part of the government’s commitment to reducing the administrative costs of regulation for businesses by 25% by the end of this Parliament, HMT will take steps to encourage the use of digital identity for MLRs identity verification checks and has consulted on the need for clarifying guidance for regulated sectors.”

The changes are likely to be the result of work HMT has been doing in recent years. A review of the MLRs in 2022 found that, while the core requirements of the regulations were mostly fit for purpose, there were potentially a number of technical changes that could be made to increase effectiveness and ensure proportionality for both regulated firms and customers.

A consultation issued in March 2024 put forward ways to make customer due diligence “more proportionate and effective”, strengthen co-ordination by different bodies across the AML regime, provide clarity on scope of the MLRs and reform registration requirements for the Trust Registration Service.

HMT will hopefully also announced the long-awaited outcome of a 2023 consultation on AML supervision. This put forward four potential models for reform – without stating a preference – the first of which is a beefed-up OPBAS with greater powers, including to levy fines.

This model would be “the most immediately feasible”, HMT said. “However, given the significant efforts of OPBAS in previous years, and the incremental pace of progress to date, it is possible that this model would not bring about a step-change in the risk-based approach of PBSs.”

This has nonetheless received support from the likes of the Bar Standards Board, Society of Trust and Estate Practitioners and Law Society for Scotland.

The second option is consolidating professional body supervision, meaning that there would be a single legal sector supervisor either for the UK or for each of England and Wales, Scotland and Northern Ireland. The same model would be put in place for accountants. Both the Legal Services Board and the SRA have put themselves forward for this role.

The third option is to end professional body supervision and most likely create a new organisation, probably a public body, to undertake the task for both lawyers and accountants, as well as trust and company service providers – some 60,000 firms in all – and potentially another 17,000 estate and lettings agency businesses.

“There are possible benefits to this, including that it may be more appropriate for a public body to hold broad enforcement powers, due to oversight of these bodies by Parliament,” the consultation said.

The size of such a body “should allow it to unlock efficiencies and improve effectiveness through allocating resources in line with risk across the entire professional services sector, though would be a considerable undertaking for a new function and may mean that some firms receive less oversight than at present as a result of being of lower priority within a much larger supervisory population (in line with the risk based approach)”. This would be “a substantial process that would take several years”, HMT acknowledged.

The final option expands on this and would see all current AML supervision to a new body, bringing lawyers and accountants together with financial services, gambling and all other regulated sectors.

For campaign group Spotlight on Corruption, only a single body policing AML supervision across the UK legal sector will deliver “the step change in effectiveness” that is needed. “Fiddling around the edges of a broken system will not be enough to raise the standards of AML supervision across the board,” it said in a report earlier this year entitled Broken Record. “We need to grasp the nettle of structural reform.”

Spotlight said: “Lawyers need to be at the forefront of preventing dirty money entering the UK. But time and again lawyers have been found to be some of the most prominent professionals at the heart of laundering schemes, or facilitating transactions for clients against whom there are widespread allegations of corruption.”

Game changer

Indeed, at an event at the Houses of Parliament in March, the Prime Minister’s anti-corruption champion called for a new criminal offence that would see lawyers prosecuted for failing to prevent money laundering and economic crime.

Speaking at an event on the role of lawyers as professional enablers of corruption, organised by the All-Party Parliamentary Group on Anti-Corruption and Responsible Tax, former Labour cabinet minister Baroness Margaret Hodge said economic crime had a huge impact on the UK economy and was damaging trust in the jurisdiction.

“In March, the Prime Minister’s anti-corruption champion called for a new criminal offence that would see lawyers prosecuted for failing to prevent money laundering and economic crime.” 

“The strength of the professional and financial sectors cannot be secured on the back of dirty money,” she declared. “When you think about all these wicked people… they do not invent the schemes. The schemes are invented by the enablers, of which lawyers, I’m afraid, are one.

“There are lots of ways lawyers help, whether it is construction companies, buying properties, setting up trusts, or acting on behalf of kleptocrats in SLAPPs [strategic litigation against public participation]. You are very important in that whole landscape of how corruption and kleptocracy thrives.”

The peer said the ministers were “very keen to pursue an anti-corruption strategy” and listed four areas that were being looked at in relation to lawyers.

The first was supervision, and she said there was “a pretty wide consensus that it would make sense” to bring all the supervisors into one organisation “to get some consistency, and to stop people jumping from one organisation to another as well”.

Second was the suspicious activity reports (SARs) regime. “There’s a tendency now to bureaucratically respond if you have a suspicion of malpractice. You just fill in a SAR and somehow you’ve done the business and you have no responsibility to go further,” she said.

The regime needed to be one that helped the enforcement agencies pursue wrongdoers and lawyers alert the authorities about red flags on matters.

The third was more action over SLAPPs, for which there is “real broad support in both Houses”.

The final one was what Baroness Hodge described as “my passion”. She explained: “The sad thing about the last economic crime bill was that we built a consensus across all political parties that we ought to introduce a new criminal offence which would apply to all the enablers, including the lawyers, whereby if they fail to prevent money laundering and economic crime, they could be prosecuted.”

It did not make it to the statute book, however. “We didn’t want to lock up everybody… but we think it is an incredibly effective tool for stimulating behaviour change.”

The evidence from introducing a failure to prevent offence in the Bribery Act and, before that, to prevent injuries on construction sites, showed that they worked. “I think this could be a game changer… If we could do that, we would then really see a massive step change in the growing horror of what economic crime has become and what Britain has become, which is one of the jurisdictions of choice for dirty money.”