Law firms tighten up anti money laundering activities

There has been a 13% drop in the number of reports submitted by accountants to the Solicitors Regulation Authority (SRA) about failings in how lawyers handle client money over the past year

There were 1,194 qualified reports in 2018, down from 1,380 the previous year, according to SRA accountants’ reports analysed by Hazlewoods. There has been a marked improvement in the last five years, due to the introduction of much tougher anti-money laundering rules. In 2014, by comparison, there were 4,731 reports. Law firms have also tightened their internal controls amid concerns about possible unintentional support for money laundering.

The SRA is targeting law firms providing banking facilities to clients, which is prohibited under the rules governing the legal profession. It has a particular focus on instances where law firms hold or move money on behalf of their client, where this does not relate to the underlying legal transaction they have been appointed to undertake.

This raises a risk that where law firms provide banking facilities, they may inadvertently be opening a ‘back door’ and assisting money laundering, tax evasion or hiding a client’s assets from their creditors. Money launderers are thought to target law firms as they think they are not as strict as banks in their anti-money laundering checks.

There are also problems as law firms sometimes mishandle client money by retaining client money after legal matters have completed, and residual client balances are not returned.

‘The National Crime Agency has identified law firms as being particularly vulnerable to being exploited by money launderers, so this is likely to be an area of intensive focus by the SRA over the next few years,’ said Jenny Staight, associate director at Hazlewoods.
The SRA has also issued revised guidelines on the definition of serious breaches of the SRA accounts rules. This follows the regulator’s decision to relax reporting requirements for accountants in 2014, which has contributed to the substantial fall in reports over the last five years.

In May, an SRA review focused on 59 law firms providing trust and company service and although it did not find evidence of actual money laundering or any intentions of becoming involved in criminal activities, it did identify a number of breaches of the 2017 Money Laundering Regulations. As a result, 26 firms were put into the SRA disciplinary process.

The SRA has now begun a further review of 400 law firms to check compliance with the new regulations. This review will be led by a dedicated anti-money laundering unit, which has been set up to strengthen resources to prevent and detect money laundering.

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