AML update for Lawyers and Law Firms

We are already half-way through 2024 and, as predicted, the fast-paced world of AML shows no signs of stagnation, with the key front line regulators such as the SRA frequently updating its AML guidance, as well as recent legislation from the European Commission, and specifically the creation of a new European AML agency in Germany. This blog continues our series of updates for legal practitioners and law firms on the key developments from recent months.

1. SRA updates sectoral risk assessment concerning AML and terrorist financing

On 5 March 2024, the SRA published an updated sectoral risk assessment, designed to take into account any risks and trends that have emerged since the previous edition in July 2023 (including, for example, the increasingly prevalent use of AI, as well as the lingering implications of Covid-19). This update, which the SRA reiterates must be considered as part of any firm-wide risk assessments, contains the following changes:

• A number of new risk areas, including vendor fraud, pooled client funds, third-party managed accounts, and irregular methods of transferring funds has been flagged by the SRA;
• ‘Sanctions’ has now been placed under its own separate risk heading, illustrating the necessity for firms to comply with international sanctions regimes, especially in the wake of the continued Russian military action in Ukraine;
• The SRA’s Covid-19 policy has been revised to retain references to risks that persist post-pandemic, whilst removing those no longer relevant;
• An explicit reference in the risk assessment to the growing risk related to modern slavery in cash-based industries;
• Domestic PEPs will still be subject to enhanced due diligence, but must be treated at a lower risk level than overseas PEPs;
• The SRA have provided further information regarding AI and cybercrime, underscoring the importance of robust cybersecurity measures.

 

2. hm treasury publish consultation on reviewing the money laundering regulations

HM Treasury has published its consultation on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations (MLRs) 2017, which closes on 9 June 2024 at 11:59 pm. The consultation primarily centres around four issues:

• Making customer due diligence more proportionate and effective;
• Strengthening system coordination;
• Providing clarity on scope of the MLRs;
• Reforming registration requirements for the Trust Registration Service.

The consultation document lays out a number of ways to get involved with the consultation, as well as an online survey entitled ‘Improving the Effectiveness of the Money Laundering Regulations Form’. HM Treasury is also running a tandem survey on the cost of compliance with the MLRs, and it is appealing for responses from a wide range of regulated businesses, including large firms, SMEs, and sole traders. These consultations provide a great opportunity to be feedback on the practical realities stemming from the current MLRs.  

 

3. Government responds to the law commission's aml report

On 12 February 2024, the government published its response to the Law Commission’s AML report on  the proposed reforms to the suspicious activity reports (SARs) regime, which it began in 2017 and published in 2019. Overall, the government accepted six of the Law Commission’s recommendations, partially accepted a further seven, and rejected the remaining six.

Whilst the government accepted the continued retention of the consent regime, as suggested by the report, it rejected the proposed amendment to the Proceeds of Crime Act 2002. This proposed amendment would have imposed an obligation on the Home Secretary to issue guidance, stating that “the government views it as entirely appropriate that regulators are able to issue sector specific guidance”. Notably, the government also rejected the Commission’s recommendations of retaining the existing low value transactions regime and not introducing a minimum financial threshold. The basis for these recommendations stems from the threshold below which certain institutions can carry out a transaction without committing a money laundering offence to £1000, having already been increased in January 2023. It did accept, however, maintaining the ‘all-crimes’ approach to reporting suspicious activity, putting “the burden of assessment and triage […] on law enforcement agencies as those best placed and most qualified to pass judgement”.

 

4. European commission publishes new aml regulation in light of fatf plenary

Following the conclusion of FATF Plenary in February 2024, the European Commission has amended its AML regulation in line with FATF’s findings. Key changes included:

• Removal of certain jurisdictions from FATF’s increased monitoring list (namely, Barbados, Gibraltar, Uganda, and the UAE), in recognition of their “significant progress” in addressing AML deficiencies. Conversely, Kenya and Namibia were both added to the list;
• Preparation of FATF’s Strategic Priorities for 2024-2026 which will be presented to FATF Ministers in April, and is designed to emphasise FATF’s areas of key focus in achieving its goal for “sustainable and more inclusive economic development”;
• Release for public consultation of a range of options for potential changes to Recommendation 16 and its Interpretive Note on wire transfers, which FATF hopes will ensure that payment systems’ business models and messaging standards remain technology-neutral;
• Agreement on amending Recommendation 8 to bolster protection for non-profit organisations from potential terrorist financing abuse through the effective implementation of risk-based measures;
• Decision to appoint Elisa de Anda Madrazo of Mexico as the new President of FATF (2024-26);
• Creation of a new risk-based guidance for the implementation of Recommendation 25 on the beneficial ownership and transparency of legal arrangements. This is a crucial step in advancing FATF’s aim to enhance the “transparency of beneficial ownership globally and prevent criminals and terrorists from hiding their activities and funds behind complex corporate structures and legal arrangements such as trusts”. The guidance asserts the importance of “international cooperation”, and FATF will assess the implementation of these requirements by countries during an upcoming round of mutual evaluations.

 

5. new European aml agency to be based in Germany

In February 2024, the Council of the European Union announced the creation of the Anti-Money Laundering Authority (AMLA) which will be based in Frankfurt, Germany.

Beyond supervisory powers, the AMLA will retain the ability to impose monetary penalties on the entities it oversees, and these will initially be comprised of up to 40 credit and financial institutions it deems represent high risks across multiple member states. The AMLA will begin operations in 2025 and will be comprised of more than 400 staff members.

 

6. eu lawmakers vote to adopt three major aml legislative texts

In March 2024, the Committee on Civil Liberties, Justice and Home Affairs and the Committee on Economic and Monetary Affairs voted in favour of three key texts in an anti-money laundering  package. This follows on from a political agreement on the Anti-Money Laundering Regulation (ALMR) in January.

The three texts are designed to establish a “single rulebook to harmonize implementation across the bloc” in the EU’s battle against money laundering, by establishing the Anti-Money Laundering Authority (AMLA), as well as enforcing stricter rules for crypto service providers, including the requirements that they comply with all customer verification checks, and that they monitor cross-border transfers and transactions involving self-hosted wallets.

Whilst this is broadly good news, the European crypto industry is concerned that the agreed rules for crypto service providers are “harsher than those for traditional financial institutions”.

 

7. updated guidance from the sra

On 16 April 2024 the SRA updated its guidance on firm AML inspections in light of a new round of inspections beginning in May. Alongside the expected references to risk assessments and training records, the SRA have highlighted the two key changes, which include:

• A closer look at AML controls (and whether this shows evidence of a firm’s AML culture);
• That they will not necessarily always interview Fee Earners.

On 2 May 2024, the SRA published guidance on claims management activity and a high volume financial service claims warning notice, in response to concerns about potential issues with firms obtaining proper instructions from clients and supervising staff in relation to financial services claims. Particularly, when these claims form part of a high-volume/bulk claim processes involving multiple clients. In the SRA’s news article, ‘Warning law firms working on financial compensation claims’, particular emphasis was placed on the sector potentially facing a new surge in such complaints in light of recently published newspaper articles.

 

8. hm treasury publish annual report of aml and ctf

HM Treasury’s Annual Report of AML and CTF: Supervision Report 2022-23 was published on 1 May 2024. The report contained key developmental areas for the Treasury, including:

• The delivery of an ambitious and meaningful programme of changes to AML/CTF supervision, following the consultation in 2023. More information about the future structure of the supervisory system will be provided in the coming months;
• Consultation on updates to the MLRs on a range of issues identified in the 2022 review and other priority issues raised by stakeholders. Proposals of relevance to supervisors include those aimed at strengthening system coordination across the regime and considering the boundary of AML/CTF regulation;
• A document will soon be published outlining what responses the Treasury has received from the 2023 consultation on systemic reform of the AML/CTF supervision regime. It will also set out the next steps;
• A framework to better evaluate the effectiveness of ANL and CTF supervision will be released shortly as part of this year’s request for annual data covering 223-2024. It may require supervisors to update their internal systems and recording processes;
• The FATF’s fifth round of assessments to evaluate global efforts in combating ML/TF are commencing soon. This will culminate in a Mutual Evaluation Report which will be published in 2028;
• Work on the next National Risk Assessment on ML/TF and on PF, which is due to commence shortly; and
• New sanctions will continue to be imposed on Russia as well as existing measures being tightened. The expansion of sanctions supervision in the MLRs to cover all UK sanctions will be considered as part of the consultation on the potential reforms to the AML/CTF supervisory system.

 

9. the royal united services institute's commentary on the UK's ecp2

Royal United Services Institute (RUSI) published the UK’s Economic Crime Plan 2: Progress, Pitfalls and Prospects on 26 March 2024. Following its first anniversary, the UK’s ECP2 has seen significant progress, with most milestones either in progress or completed. However, uncertainty remains as to whether it will achieve long-term sustainable outcomes. The report highlights some barriers to the plan’s continuity such as the general election and the pressure to maintain focus on the ECP32 delivery in light of the FATF’s evaluation of the UK’s response to ML and TF. It will be interesting to keep abreast of the ECP2’s progress over the coming months.

 

10. ukfiu's sars annual statistical report 2023

Recently, the National Crime Agency published the UKFIU SARs Annual Statistical Report 2023. It provides a useful update on feedback received from law enforcement agencies on their use of SARs.

 

11. the second commencement regulations of the economic crime and corporate transparency act 2023

On 4 March 2024, several company law changes came into effect in accordance with the second commencement regulations under the Economic Crime and Corporate Transparency Act 2023 (ECCTA).

ECCTA delivered:

• Reforms to Companies House;
• Reforms to prevent the abuse of limited partnerships;
• Additional powers to seize and recover suspected criminal crypto assets;
• Reforms to give businesses more confidence to share information in order to tackle money laundering and other economic crime; and
• New intelligence gathering powers for law enforcement and removal of nugatory burdens on business.

A number of factsheets giving details of the different measures contained in EECA have been published. The factsheets are a useful tool to understand which legislative changes are of specific importance.

 

FURTHER INFORMATION

If you have any questions or concerns about the topics raised in this blog, please contact Julie Norris, Alfie Cranmer, or any member of the Regulatory team.

 

ABOUT THE AUTHORS

Julie Norris is a partner in the Regulatory team. She predominantly acts in legal services sector, advising law firms, solicitors, and barristers on regulatory compliance, investigations, adjudication, enforcement, and prosecutions. Julie is top ranked in both major legal directories for her work in the regulatory field.

Alfie Cranmer is an associate in the firm's Regulatory team. He specialises in advising a range of regulators and regulated professionals in relation to procedures, governance, compliance, investigations and disciplinary proceedings in the legal, finance, construction, education and healthcare sectors.