SRA Money Laundering Sectoral Risk Assessment

The SRA (as supervisor of AML compliance in authorised firms) has recently published its updated money laundering sectoral risk assessment.

Drawing on the latest UK Government National Risk Assessment, this document identifies the risks that law firms are most likely to encounter.

Why does this matter?

Law firms must consider the SRA’s sectoral risk assessment when reviewing and updating their own practice wide risk assessment (‘PWRA’), as required by MLR2017 Reg. 18/18A). The SRA will ask to see the PWRA of any firm selected for audit or investigation.

What are the key changes of the SRA Money Laundering Sectoral Risk Assessment?

The SRA has highlighted four new risks:

1.  Vendor fraud – where property fraud meets money laundering. Fraudsters target a (usually residential) property, often impersonating the owner, and sell the property without the owner’s knowledge or consent. On completion of the sale to the fraudulent buyer, the funds (now the proceeds of crime) will have passed through two law firms’ client accounts and appear to have come from a genuine property transaction.

To avoid or mitigate this risk:

• Thorough identification and verification checks are vital. If paper documents are provided, scrutinise them carefully to ensure they show no signs of forgery or alteration. Original documents such as utility bills and bank statements tend to show a connection to the property as access to the property is usually required to obtain them, and therefore they are more useful than documents downloaded from the internet.
• Be extra cautious if you don’t meet your client face to face.
• Check that the title documents properly establish vendor’s title to the property. Additional care is needed where the property is vacant, unmortgaged, or both.
  
  

2.  Pooled client funds, e.g. cash gifts at a wedding, or crowdfunding to purchase a property. This increases the risk as it can be difficult to establish the source of all the funds and therefore to know whether any of the money has been laundered or is subject to sanctions.

3.  Third-party managed accounts where the lawyer is less able to monitor the movement of client monies but remains responsible for any breaches.

4.  Irregular methods of transferring funds – the risk is increased when a client wants to deposit money in a firm’s client account in tranches or asks the lawyer to transfer sums to them or a third-party in this way. This could indicate avoidance of the bank’s AML controls.

Increasing focus on sanctions

Sanctions – which can provide a motive for wishing to obscure the origin or recipient of funds or assets – now has its own section. Although the risk of breaching the sanctions regime is separate to AML risks, the two overlap significantly.  Complex corporate structures, high risk jurisdictions, and politically exposed persons are common risks to both. If you’re unsure, the SRA published extensive Guidance on Complying with the UK Sanctions Regime in November 2022 and Guidance on the sanctions regime and firm-wide risk assessments in January 2024.

Modern slavery

The risk of modern slavery in relation to cash-intensive businesses is highlighted. Previous SRA risk assessments have raised the increased risk of client involvement in cash intensive businesses such as nail salons, take-aways and car washes. This update also requires law firms to be vigilant for signs of modern slavery and human trafficking in such businesses.

Concerns around new technology

There are new references to the risks around AI and cybercrime. Firms are reminded to assess the risks and consider potential mitigations of any new technology they introduce. The risk of ‘deepfake’ AI tools being used to impersonate a client increases the risk of relying on meeting only by video call to identify and verify a client. Firms are advised to check that their eID&V system protects them against this risk.

Domestic Politically Exposed Persons

The risk assessment notes that from 10 January 2024 an amendment to the Money Laundering Regulations changed the position regarding domestic Politically Exposed Persons (‘PEPs’). Domestic PEPs are said to represent a lower risk, and therefore to require a lower level of Enhanced Due Diligence (‘EDD’), than non-domestic PEPs. The SRA reminds firms that a lower level of EDD is still EDD. Our advice would be to continue with the EDD checks you would normally do, at least until the FCA provides its awaited interpretative guidance later this year.

Anti-money laundering

Another risk, which underlies and exacerbates all other risks, is weak AML controls in law firms. The most common weaknesses identified during the SRA’s reviews of AML compliance in law firms were inadequate:

• Source of funds checks – lawyers must check where the funds came from. It is not adequate to establish that they came from a bank account at a regulated UK institution.
• Matter risk assessments – it is not sufficient to identify and verify the client, you must assess the risk of the matter or transaction too.
• Staff screening – to avoid infiltration of firms by criminal gangs.
• Independent AML audits – a requirement of Reg. 21 MLR 2017.

In conclusion…

There is a lot of food for thought here. It’s particularly striking that the SRA’s updated risk assessment links AML with property fraud, cybercrime, sanctions and modern slavery, showing the ever-greater interrelationship between them. Ignore one of these factors and risk vulnerability to another.