With Graham Mackenzie and Colette Best
In this special, extended edition of Facing Change, our series of video chats with leading industry figures, Colette Best, Director of Anti-Money Laundering (AML) at the Solicitors Regulation Authority and Graham MacKenzie, Head of Anti-Money Laundering at the Law Society of Scotland, join us to share their insights on the impact of the current crisis on the legal sector in England, Scotland and Wales. As well as discussing the emerging risks faced by law firms, in the face of a challenging landscape, the regulators outline their expectations around how firms should continue meeting their AML obligations during this period, as outlined in their respective, recent updates.
The discussion highlights the significant additional risk created for UK law firms by the COVID-19 pandemic and subsequent economic downturn. Newly-created and exploitable vulnerabilities are putting increased pressure on compliance teams, already struggling to maintain adequate processes and controls while contending with the added complications of working remotely. At the same time, this very unique set of circumstances has turned the definition of suspicious activity upside down, making the process of risk assessment even trickier for AML teams.
As the SRA and Law Society of Scotland make clear, AML regulatory standards and outcomes across the sector will not be relaxed. However, they are offering increased flexibility to law firms around meeting their obligations, such as allowing longer response times for information requests and being more sympathetic to the need for extensions to reporting deadlines.
What’s clear from this and other discussions within the sector is that legal regulators are taking an increasingly proactive approach to AML supervision. The most recent OPBAS report supports this, noting a marked improvement in Professional Body Supervisors (PBS) applying a risk-based approach to supervision, compared to the year before. This means that law firms should expect more requests for information, more proactive monitoring and tougher enforcement for non-compliance. In short, law firms should be prepared for more scrutiny from their regulators.
This crisis is also an opportunity for the risk-based approach to shine, according to the regulators. Risks are shifting from high to low and vice versa, through the lens of the pandemic. Source of funds, for example, might previously have passed as low risk, but under current circumstances, with banks closed and flows of cash disrupted, they might be far more suspicious. This is where applying an objective, risk-based lens to AML processes could really come into its own.
Law firms need to carry out a thorough risk assessment and adapt these to meet the specific needs of their firm, which includes breaking down risk by types of work and different departments and recognising that AML probably isn’t evenly spread across different areas of the business. They also need to be absolutely sure they know who they’re dealing with, by carrying out the appropriate level of due diligence on their clients, both at on-boarding and as part of ongoing monitoring. A thorough risk assessment needs to go beyond basic identity checks and extend to other relevant risk factors such as source of wealth checks, source of funds for payments, UBO checks. It also requires clients to be regularly screened against lists of politically exposed persons (PEPs) and sanctions. Using standard online search engines to carry out these checks is not sufficient and won’t be accepted by the regulators.
Overwhelmingly, the regulators’ message to firms is to be more critical and to remain vigilant. Smaller firms, in particular, might be especially vulnerable at this time, from a number of angles. For one, the temptation may be to move resources away from compliance activity to other, revenue creating areas, during this period, with the impact of reducing AML capacity and opening the business up to unnecessary risks. For another, firms may find themselves taking on areas of law they’re not used to dealing with, where they don’t fully understand the AML risks, but for which compliance rules must be adhered to fully, the regulators warn. Limited cash flow and other business pressures may create other vulnerabilities too, not least from individuals looking to launder large amounts of cash. With wage bills and rent stacking up, a large cash injection from an ‘angel investor’ might be a real temptation for someone facing losing a lifetime’s work tied up in their business. “Don’t be tempted” is the clear message and, to borrow a phrase from the UK Prime Minister, “Stay alert!”
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