Developments in AML

The following developments/topics in the area of anti-money laundering (AML) are explored:

1. The lacuna in the AML framework for legal practitioners and law firms conducting activities that fall in-scope of the AML regulations but who are non-members of one of the legal sector’s supervisory bodies.
2. An update on the new power for AML supervisors to review the contents of Suspicious Activity Reports (SARs) and the National Crime Agency’s (NCA) new SARs portal. 
3. The publication of the Solicitors Regulation Authority (SRA) Anti-Money Laundering Annual Report 2021-2022, centring on the SRA’s focus for the future and, in turn, what should be on the radar for those operating in the sector.
4. An update to the list of high-risk third countries (specified in Schedule 3ZA of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs)).
5. A decision of the European Court of Justice (ECJ) that open public access to the beneficial owner registers of EU member state companies is no longer valid, viewed by many as an international setback in the fight against corruption.
6. The introduction of a new Order that has increased the threshold amount specified in the Proceeds of Crime Act 2002, section 339. 
7. The Economic Crime and Corporate Transparency Bill (ECCT Bill), and specifically provisions for the SRA to be given (i) unlimited fining powers and (ii) a new information request power, in matters relating to economic crime. 
8. Publication of HM Treasury’s AML and countering the financing of terrorism (CFT) supervision report 2020-22 and some of its key findings.
9. Recent SRA internal fines against law firms for AML failings as the SRA continues to sharpen its regulatory focus in this area. 

Supervision for non-regulated firms

In June 2022, HM Treasury published its Review of the UK’s AML/CFT regulatory and supervisory regime. The review recognises a supervisory gap in the legal sector. While in the accountancy sector, HMRC acts as the default supervisor for AML supervision where an accountancy service provider is not a member of a professional body supervisor but undertakes regulated activities for MLR purposes, the legal sector has no such backstop.

The review sets out a number of potential models for reform: 

• Professional body supervisor (PBS) consolidation – all PBSs (for example the SRA) be allowed to supervise non-members for AML purposes.
• Single professional services supervisor (SPSS) – reduce the number of supervisors across the regime. The new SPSS would assume the role of default supervisor for the legal sector.
• Single AML Supervisor (SAS) – similar to the SPSS model but it could take on new regulated sectors beyond professional services.

The government is due to issue a formal consultation to, “better understand the implication and practicalities of each model” and to test its understanding of the benefits and risks. The review highlights that changes would take place over a period of years. In the interim, the government states it will, “continue to work with supervisors to improve supervisory effectiveness and ensure that more short-term improvements are still achieved while longer term reform is considered.” 

While the regulatory gap has been identified, the solution is still pending. As the models above are tested and explored a key consideration is how will the supervisory function of any future model work in the absence of a regulatory framework to support such function (for non-members). Early suggestions are that there is a push for sector-specific supervisors. 

SARs update 

The latest SARs Annual Report from the UK Financial Intelligence Unit in the NCA covers the period 2020-21 and 2021-22 and therefore covers both the COVID-19 pandemic and implementation of sanctions following Russia’s invasion of Ukraine, which may explain the 21% increase in SARs to 901,255, received in the year ending 31 March 2022.

In a previous update, we reported on the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 and the proposed new explicit legal power enabling AML and Counter Terrorist Financing supervisors, such as the SRA, to access, view and consider the quality of SARs submitted by those they supervise, provided they are necessary to fulfil supervisory functions. We reported that this new gateway will allow the SRA to obtain and identify information and intelligence with the aim of better informing its understanding of sectoral risks and enabling more tailored guidance as a result. At the time of our previous update, this new power was subject to parliamentary approval. The relevant regulation has now come into force (as of 1 September 2022). 

The NCA has now rolled out a new online portal (live in some sectors since October 2022), which will run alongside the old portal for a period of time, for submission of SARs.  

The online portal is the NCA’s recommended method for the submission of SARs. According to the NCA this is because it: 

• provides an automated acknowledgment of successful submission; 
• assists in structuring the SAR to be comprehensive, improving processing time for law enforcement; and 
• offers the opportunity to request a Defence Against Money Laundering (DAML) or Defence Against Terrorist Financing (DATF). 

The key benefits are identified as it being easier to submit structured, meaningful and comprehensive SARs and increased data quality of submissions which will provide enhanced intelligence to the UK Financial Intelligence Unit, law enforcement agencies and government departments in their fight to disrupt criminal activity. 

A copy of the SAR needs to be printed or saved prior to submission as once it is submitted, you can no longer view or print a copy of the report. 

SRA annual report

In October 2022, the SRA published its Anti-Money Laundering full annual report (2021-22).

In the report, the SRA identifies a number of emerging risks and confirms that it will monitor such areas going forward with a view to ascertaining what further steps are required: 

1. The SRA acknowledges the significant changes that have emerged in the last 12 months in terms of risks relating to financial crime, including the “economic upheaval” resulting from the COVID-19 pandemic and the war in Europe, “compounded by the massive expansion in sanctions and their associated risk.” While acknowledging these are not money laundering specific issues, the SRA recognises that they, “generally fall on those responsible for money laundering and terrorist financing compliance.” 
2. The SRA promised guidance, which has now been published (Complying with the UK Sanctions regime), which sets out its expectations of firms in the recently evolved sanctions regime and aims to help firms comply with their obligations (tinyurl.com/yxnwmpzb). The SRA has stated it will increase its work on compliance with sanctions, it having recently checked the client lists of some high-risk profile firms and completed a thematic review of financial sanctions. 
3. The SRA further acknowledges the, “significant number of changes to legislation”, including the introduction of the register of overseas owners of UK property and the resulting “vulnerability and uncertainty” as such new requirements “bed in.” Separately, the SRA has recently acknowledged the relentless nature of legislative reform in this area but emphasised why it matters, with the headline point that more than £12 billion of criminal cash is generated in the UK per year.  
4. A review of the SRA’s sectoral risk assessment is necessary, the SRA referencing it when confirming conveyancing and dubious investment schemes remain the two areas where most money laundering risks arise.
5. The SRA has reported that it, together with other legal sector money laundering supervisors, have been working on the topic of evading currency controls during the preceding year. The SRA has highlighted the need to understand any scenario where an individual has evaded non-UK currency controls via financial institutions in part by misrepresenting the intended purpose of the funds. The SRA reports a mix of issues within this, “including concerns about the source of funds where capital controls present in a given country drive clients to seek workarounds. Some of these can carry a greater money laundering risk.” (See the Legal Sector Affinity Group issued a notice on Chinese underground banking and funds from China.)  

In addition to monitoring emerging risks, the SRA has confirmed it will continue to focus on the following in the year ahead:  

• taking a risk-based approach to firms and desk-based reviews, to gain a richer understanding of AML systems, processes and procedures in place;
• helping firmws put strong controls in place to prevent money laundering and bringing enforcement action against firms that are not meeting their responsibilities under the regulations; and
• providing targeted and timely guidance for firms through a programme of lunchtime webinars focused on discrete AML topics.

The report’s messaging is (deliberately?) one of a proactive and collaborative AML supervisor, operating in the spotlight, following Russia’s invasion of Ukraine. With increased resourcing, and with the promise of increased inspections and desk-based review supervision, the SRA warns now is the time to “put your house in order.” 

High risk jurisdictions list

On 15 November 2022, the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No 3) Regulations 2022 came into force, in turn substituting the existing list of high-risk third countries specified in Schedule 3ZA of the MLRs with an updated list. The list continues to mirror the Financial Action Task Force’s (FATF) ‘Jurisdictions under increased monitoring’ and ‘High-risk jurisdictions subject to a call for action’ documents and consolidates such countries into a single list. 

The Democratic Republic of the Congo, Mozambique and Tanzania have been added to the list. Nicaragua and Pakistan have been removed from the previous list. 

Regulation 33(1)(b) of the MLRs requires regulated businesses (“relevant persons”) to apply enhanced customer due diligence measures and enhanced ongoing monitoring in any business relationships with a person established in a high-risk third country or in relation to any relevant transaction where either of the parties to the transaction is established in a high-risk third country.  

HM Treasury’s relevant Advisory Notice provides further detail. 

In February 2023, FATF suspended Russia from membership for its continuing military invasion of Ukraine. Nigeria and South Africa are on its so-called grey list of countries requiring increased monitoring because of deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.

ECJ: public access to beneficial ownership information invalid

On 1 August 2022, the Register of Overseas Entities (ROE) was implemented by the Economic Crime (Transparency and Enforcement) Act 2022 and the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (SI 2022/725). From 1 August 2022, clients that are overseas entities and are the registered proprietor (as of 1 January 1999) of a freehold estate or a lease granted for a term of more than seven years from the date of grant, or wish to acquire either, must disclose the entity’s beneficial ownership and register on the ROE maintained by Companies House.

The ECCT Bill, currently before the House of Lords (Committee stage), further provides that individuals who register companies or file with the Registrar will have to verify their identity (see the government’s relevant Fact Sheet). This will apply to existing directors, people with significant control and those delivering documents to the Registrar. 

On 22 November 2022 the ECJ found that, “the general public’s access to information on beneficial ownership  constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data”, according to a press release from the court. 

In turn, countries such as Luxembourg, the Netherlands, Germany and Ireland closed their public beneficial ownership registers. Guernsey, the Isle of Man and Jersey have announced that they are delaying the implementation of legislation to introduce full public access to registers of company beneficial ownership and that they are taking legal advice as to their future course of action.

The ECJ decision has been criticised as a retrograde step in the fight against corruption.

How the UK responds to EU developments will be interesting; should the verification process envisaged by the ECCT Bill become law, this, in particular, could see the UK move ahead of the EU in terms of safeguards in this field. 

Introduction of the Proceeds of Crime (Money Laundering) (Threshold Amount) Order 2022 (SI 2022/1355)

This Order increases from £250 to £1,000 the threshold amount specified in the Proceeds of Crime Act 2002 section 339, which is the value of criminal property below which a bank or similar firm (a deposit-taking body, electronic money or payment institution) can carry out a transaction, in operating an account for a customer, without committing one of the main money laundering offences in sections 327 to 329 of the 2002 Act. It came into force on 5 January 2023. 

Unlimited fines for economic crime

The ECCT Bill proposes the insertion of a new regulatory objective for legal services regulators, under section 1 of the Legal Services Act 2007, namely to promote the prevention and detection of economic crime. The Bill further provides the power to the Law Society (which in reality means the SRA) to issue unlimited fines to regulated firms, solicitors and employees in matters relating to economic crime, by amending relevant sections of the Solicitors Act 1974 and the Administration of Justice Act 1985, to remove the limit on the amount of fine the SRA can impose on traditional law firms and individuals in those firms (£25,000 as of July 2022) if the misconduct relates to economic crime.  

While it may be some time before the proposals become law, if approved, it is clear that the rationale for the changes align strongly with current government objectives to clamp down on economic crime in light of recent political events, notably the current situation in Ukraine, and this will no doubt impact the speed at which the Bill passes through to final consideration. 

The scope of the proposal is wide-ranging, covering a broad array of offences deemed ‘economic crimes.’ Situations in which the SRA may apply unlimited fines will include scenarios where an individual or firm positively acts in failing to detect and prevent economic crime, where they act in such a way that inhibits prevention or detection, and also where they fail to act when expected to, and which as a result of that failure, the crime is inhibited from being prevented or detected.

In order to give effect to the new provision, the SRA will likely seek to pass associated rules that, “apply only for the purposes relating to the prevention or detection of economic crime.” Those rules would be the most straightforward gateway into its use of the power, and would be a direct alternative to it needing to prove that the act or omission in fact, “had the effect of inhibiting the prevention or detection of economic crime”, which will be factually more challenging and might require proving the underlying crime itself.  If this analysis is correct, the SRA could have a separate set of rules and bring enforcement action on the back of those, without needing to use the other limbs. 

The SRA will be able to impose unlimited fines on individuals, firms and employees where it determines that failures have occurred, either through an act or omission. There may be an underlying conviction for a criminal offence, but there need not be. 

The SRA has warned that if its fining powers increase in this way it, “will use those fining powers to the full extent to make sure that there is compliance in the AML area.” This warning is hardly surprising given the findings of the Spotlight on Corruption report (tinyurl.com/2fz48sjn) that enforcement action taken by the SRA to date (and by the other legal service supervisors) has been “uneven and inadequate.”

Even greater powers for the SRA

Through the ECCT Bill the government has also recently introduced a new information request power for the SRA in relation to economic crime.  

Currently, the SRA has the power to require specified information or documents to be provided only where it is necessary to do so for the purposes of an investigation under section 44B of the Solicitors Act 1974. The government provides the examples of information for an investigation into suspected professional misconduct by a solicitor or a failure to comply with a relevant requirement. 

The SRA also has the power to proactively request information and documents from individuals or firms it supervises in its role as a PBS under the MLRs. However, approximately 3,200 law firms and sole practitioners are not covered by the MLRs. The government has said: “This means that the SRA cannot effectively practise proactive checks, and therefore risk-based regulation, across the whole of its regulated community.”

The new power will enable the SRA to proactively request information from all regulated individuals, licensed bodies and firms within its regulated community, in relation to economic crime. The government has further said: “[t]his will ensure that the SRA has the necessary proactive information request powers to fulfil its obligations to effectively oversee and enforce the deterrence and detection of economic crime. This will enable effective risk-based regulation and better targeting of the SRA’s monitoring and enforcement work in relation to economic crime.”  

HM Treasury’s Supervision Report

In December 2022, HM Treasury published its ‘Anti-money laundering and countering the financing of terrorism’ supervision report 2020-22. Whilst the report showed significant improvements in several areas of supervision over the reporting period, HM Treasury and AML/CFT supervisors remain committed to strengthening the UK’s approach to defending against money laundering. It states, “[c]lose partnership-working will be central to efforts to enhance the proportionality and effectiveness of the AML/CFT regime.”

The report highlights the key role the UK’s AML/CFT supervisory regime plays in the enforcement of the sanctions imposed following Russia’s invasion of Ukraine in February 2022, with supervised firms being required to monitor lists of designated persons and entities to ensure they are not providing services to sanctioned individuals and entities. Supervisors, like the SRA, “consider the systems and controls that a firm has in place to mitigate the risks of breaching relevant sanctions as part of their AML compliance checks.” 

As part of the report, Accountancy and Legal PBSs (which includes the SRA) reported the following as the most common breaches identified during the two reporting periods examined (the 2020-2021 period (6th April 2020 – 5th April 2021) and the 2021-2022 period (6th April 2021 – 5th April 2022)):

• Inadequate documented policies and procedures 
• Inadequate CDD procedures 
• Inadequate EDD procedures 
• No ongoing CDD monitoring 
• No periodic review of compliance with MLRs 
• Inadequate firm-wide risk assessment 
• No or inadequate staff training on AML compliance 
• Inadequate record keeping 
• Use of third-party policies that were not adequately tailored to the specific firm’s individual risk profile 
• Inadequate resource allocated to AML compliance.

Many PBSs also noted that non-compliance and poor AML procedures were most common with smaller firms and sole practitioners, who often failed to understand the importance of having adequate AML controls in place. A long-standing relationship between a client and a business leading to insufficient checks was also noted by many PBSs as being a common theme identified in non-compliant members of their supervised population.

Following publication of the report, Spotlight on Corruption has commented that it represents “patchy progress” and is illustrative of the “fragmented supervisory landscape” with there being a need for more ambitious and comprehensive reforms beyond the current ECCT Bill to, “provide effective defences against the flow of dirty money into the UK.”

SRA issues highest fine for traditional law firm for money laundering failures 

This January, the SRA fined Oxfordshire practice Ferguson Bricknell a record £20,000 for a lack of compliance that in the words of the SRA, “showed an AML control environment failing at the firm.” This is the highest sum so far imposed by the SRA since its fining powers increased from £2,000 to £25,000 last year for traditional law firms (ie non ABSs). The concerns included the firm incorrectly making a declaration to the SRA in January 2020 that its firm-wide risk assessment was compliant with the latest MLRs and in line with relevant guidance, when it was not. 

The corresponding Regulatory Settlement Agreement can be accessed. 

The SRA has also recently fined two firms £2,000 each, for whom conveyancing and controlling client money were deemed significant areas of work, for failing to have in place compliant firm-wide risk assessments and incorrectly declaring that the firms’ risk assessments were compliant.