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This update covers recent developments relating to the regulation of money laundering in the legal sector and implications for legal practitioners and law firms. Specifically, four updates are explored. The first relates to the SRA’s AML information-gathering exercise, undertaken as part of its role as anti-money laundering supervisor under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Second, we look at HM Treasury’s response to its consultation on reform of the UK AML regime. Relevant changes emanating from this are expected to come into effect on 1 September 2022 by way of new secondary legislation entitled 'The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022'. The third development concerns HM Treasury’s approval of the updated Legal Sector Affinity Group (LSAG) Guidance which was issued in 2021. Finally, and linked to this, two new LSAG Advisory Notes have been published which serve to clarify expectations of the Legal Sector Professional Body Supervisors, including those of the Solicitors Regulation Authority (SRA), in relation to particular topical areas of risk.
The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022
HM Treasury’s response to its consultation entitled ‘Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022’, proposes several changes which are expected to come into effect on 1 September 2022, subject to Parliamentary approval.
Among the key changes, the following are particularly relevant to the legal sector (and whilst they do not represent a major overhaul of the guidance, they are nonetheless important for firms and solicitors to know about):
- There will be a new explicit legal power enabling AML and Counter Terrorist Financing (CTF) supervisors, such as the SRA, to access, view and consider the quality of suspicious activity reports (SARs) submitted by their supervised populations, provided they are necessary to fulfil supervisory functions. 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.
- The new SI will also supplement Regulations 16, 17, and 18 of the Money Laundering Regulations (MLRs) to require lawyers, notaries, other independent legal professionals, as designated non-financial businesses and professions (DNFBPs), to carry out risk assessments of proliferation financing (PF) alongside their current AML/CTF risk assessments. It is understood that a degree of flexibility will be afforded such that firms may satisfy this new obligation by either creating a new risk assessment or by incorporating the PF risk assessment into their AML/CTF risk assessments, to minimise the burden and additional costs.
- Regulation 52 of the MLRs, which deals with disclosure and sharing of information and intelligence by supervisory authorities, will also be extended. Whereas currently, information disclosed to a relevant authority (another supervisory authority, HM Treasury, any law enforcement authority, or an overseas authority) may not be further disclosed by that authority except in certain circumstances, the regulation 52 gateway will be amended to make this less restrictive, allowing for reciprocal sharing from relevant authorities (specifically law enforcement) to supervisors.
Law firms to provide information on extent and scale of potential exposure to AML risks to SRA by 31 July 2022
On 6 June 2022, the Solicitors Regulation Authority (SRA) announced that law firms in England and Wales who fall within the scope of anti-money laundering (AML) regulations are required to provide data on the scale and potential risks of their work. Firms are being asked to fill in a questionnaire with the following information which must be submitted by 31 July 2022:
- The value of work conducted for their largest single client.
- Physical cash thresholds.
- How much higher risk work they conduct.
- Number of internal concerns raised about potential money laundering risk, and suspicious activity reports (SARs) submitted.
Firms must provide the information based on either their last calendar, business, tax or rolling year and the data collected will be used to help analyse the potential AML risks posed by the regulated firms to assist the SRA in the discharge of its AML supervisor function. Firms are warned that failure to provide this information by the deadline may result in enforcement action.
HM Treasury’s approval of the Legal Sector Affinity Group (LSAG) guidance 2021
The latest LSAG Guidance issued in 2021 has now been approved by HM Treasury, meaning it now has full standing under the MLRs specifically under regulation 86(2)(b)(ii) which requires courts to consider whether guidance has been followed when judging whether a legal practitioner or practice has committed a criminal offence under the MLRs. Likewise, the Guidance has full standing when the SRA, as a designated supervisory authority, is deciding whether to impose a civil penalty for breach of the regulations, as per regulation 76 of the MLRs.
The updated LSAG Guidance 2021 contains several changes to the previously published version, including:
- An expanded explanation around the reasonable measures needed when practitioners and firms are verifying the identities of beneficial owners that are non-natural persons (i.e. a legal person, trust, company, foundation or similar legal arrangement). The same standard of ID and V is needed as with natural persons. Reasonable measures must be taken to understand the ownership and control structure of the legal person, trust, company, foundation or similar legal arrangement (paragraph 6.14.10). A new provision has been inserted that was not in the draft version that allows certified information from non-independent sources to be used in lower risk matters.
- Higher risk jurisdictions are now determined by the UK Government’s list of High Risk Third Country list rather than those of published by the EU (paragraphs 5.6.2.1 and 6.19.1)
- Clarification in terminology in the LPP section. Legal professional privilege does not apply where the transaction you are working on has the intention of furthering a criminal offence (rather than a money laundering offence, as per the draft version) (paragraphs 13.4.2 and 13.4.3)
- Expanded explanation of what an arrangement, under Section 328 of the Proceeds of Crime Act 2022 (POCA) is not. [1] Paragraph 16.3.6 of the LSAG guidance 2021 clarifies that conduct of litigation and disputes before a tribunal do not constitute an ‘arrangement’; however, practitioners are reminded that once litigation is resolved, criminal property retained following resolution may attract possible offences under POCA. Further clarification is also provided in terms of the ‘adequate consideration’ defence, which by virtue of s.329 of POCA is restrictive (see paragraph 16.4.2)
LSAG Advisory Notes 2022
While Advisory Notes issued by LSAG do not have the same standing as its Guidance, and do not require HM Treasury approval, they provide helpful information to practitioners and firms in terms of keeping abreast of the expectations the SRA requires of them, and are supplemental to the Guidance.
The latest Advisory Notes focus on two areas:
- Remote working, client interaction and associated use of AML technology – the growth of remote working practices within the legal sector following COVID-19 has given rise to new risks concerning client due diligence (CDD) procedures. Where client identification and verification checks are undertaken outside the office, a risk-based approach is advised when considering alternative methods. The advisory note is helpful in providing a list of non-exhaustive alternative methods. Where digital ID and verification third party services are used, the note reminds practitioners to carefully consider whether the service can be relied upon as ultimately the responsibility to make sure the ID and verification checks are undertaken correctly remain with the legal practitioner and firm. Other issues to consider when working remotely are also outlined.
- Impacts of economic instability – economic instability is also considered to raise the possibility of increased money laundering risk or reduction of controls. This may occur through de-prioritisation of compliance work, extending areas of legal practice to cover those which are less familiar, and seeking to alleviate financial pressure by accepting greater levels of risk from clients. The note therefore emphasises the importance of spotting red flags during periods of economic uncertainty, which may include situations where instructions relate to unusual types of clients or matters, client resistance with regards to compliance checks or pressure to forego the necessary checks, and transactions where the business rationale for the transaction is unclear.
This update provides a brief overview of the key developments to have taken place over recent weeks in relation to the regulation of money laundering in the legal sector. We would encourage our readers to consider the publications, guidance and advisory notes that have been referenced above by following the embedded links to each of the documents.
[1] A person commits a money laundering offence if they enter into an arrangement or become concerned in an arrangement which they know or suspect facilitates the acquisition, retention, use or control of criminal property by, or on behalf of another person”.
Further information
If you have any questions or concerns about the content covered in this blog, please contact Julie Norris or a member of the Regulatory team.
About the author
Julie Norris is a partner in the Regulatory team. She predominantly acts in the professional services sector, advising law firms, solicitors and barristers as well as accountants and built environment professionals on regulatory compliance, investigations, adjudication, enforcement and prosecutions.
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