Developments in AML

The following developments / topics in the area of AML are explored:

1. 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.
2. 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)).
3. 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. 
4. HM Treasury’s AML and countering the financing of terrorism (CFT) supervision report 2020-22. 
5. A recent SRA internal fine against a law firm for AML failings as the SRA continues to sharpen its regulatory focus in this area.  

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, (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, 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 £12bn 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 (tinyurl.com/4yyrhtuj).
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.” (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 firms put strong controls in place to prevent money laundering and bringing enforcement action against firms that are not meeting their responsibilities under the regulations.
• 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.

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.

Unlimited fines

The ECCT Bill proposes the insertion of a new regulatory objective for legal services regulators, under section 1 of the Legal Services Act 2007, to promote the prevention and detection of economic crime. The Bill further provides the power to the Law Society (which means the SRA) to issue unlimited fines to regulated firms, solicitors and employees in matters relating to economic crime. The Bill aims to amend 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.  

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, “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  that enforcement action taken by the SRA to date (and by the other legal service supervisors) has been “uneven and inadequate.” 

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 SRA also has the power to proactively request information and documents from individuals or firms it supervises in its role as a professional body supervisor 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. While 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 fact sheet can  be accessed here (tinyurl.com/2spxkd6k ).

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

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 regulatory settlement agreement can be accessed here).