AML and Sanctions Update for Legal Practitioners and Law Firms – August 2023

This blog covers some important developments in the AML world since our last quarterly update for legal practitioners and law firms.

Time to review your FWRA – SRA updates its Sectoral Risk Assessment

The SRA published its updated Sectoral Risk Assessment on 24 July 2023, which must be considered as a part of each law firm’s firm-wide risk assessment.

The Sectoral Risk Assessment now includes information on proliferation financing risk, which reflects the recent updates to the Legal Sector Affinity Group (“LSAG”) AML guidance for the legal sector. In short, firms are now required to determine their exposure to the risk of proliferation financing in their own firm-wide risk assessment, notwithstanding that the SRA considers the overall risk posed by proliferation financing to the legal profession to be low. A more thorough assessment is expected of firms if they operate in sectors such as trade finance, commercial contracts and manufacturing, or if they have exposure to countries which are subject to UN sanctions or seeking to acquire weapons of mass destruction.

The Sectoral Risk Assessment also expands the existing section on financial sanctions risk. The sanctions regime is separate to the proceeds of crime and money laundering regimes, but involves many of the same elements, such as the risk factors of suspect jurisdictions, politically exposed persons (PEPs) and complex corporate structures. Our blog on the most recent regulations relating to restrictions in acting for those tied to the Russia regime can be found here.

Some geographical risks have been added too, such as the fact that a firm with different offices in different areas may have different AML risks for each of those particular branches.

Finally, themes such as legal cannabis and Covid-19 have been removed from the Sectoral Risk Assessment as they are no longer considered ‘key risks’.

Updated guidance for electronic identity verification

Whilst still subject to approval of HM Treasury, the Joint Money Laundering Steering Group (JMLSG) has published a revision to paragraph 5.3.89 in Part I of its Guidance, which is in relation to steps which ought to be taken to manage the risk of impersonation fraud when identity is verified electronically.

It states:

Where identity is verified electronically, copy documents are used, or the customer is not physically present, a firm should apply an additional verification check to manage the risk of impersonation fraud by directly linking the customer to the claimed identity. In this regard, firms should consider:

• verifying with the customer additional aspects of their identity which are held electronically; or
• utilising biometric data (including facial recognition and liveness checks where appropriate); or
• requesting the applicant to confirm a secret code, or biometric factor – such codes, digital verification or other secret data may be set up within the identity, or may be supplied to a verified mobile phone, or through a verified bank account, on a one-time basis; or
• following the guidance in paragraph 5.3.90.

JMLSG produces guidance to assist those in financial industry sectors represented on JMLSG by their trade member bodies, to comply with their obligations in terms of AML and CTF legislation.

Firms would be prudent to get ahead of the game and revise their firm-wide risk assessment accordingly.

Proposed changes to AML supervision – Treasury consultation goes live

On 30 June 2023, HM Treasury published a consultation on ‘reforming anti-money laundering and counter-terrorism financing supervision’, in which two of the four proposals centred on a single regulator for AML. The consultation closes on 30 September 2023.

The Office for Professional Body Anti-Money Laundering Supervision (“OPBAS”) already operates to oversee the three statutory supervisors and 22 professional body supervisors (PBSs), including the SRA. The consultation notes, however, that there is no single authority responsible for detecting ‘unsupervised’ firms in the legal sector, even where they are carrying out activity in scope of the MLRs.

Whilst less radical options are explored in the consultation, such as increasing the powers of OPBAS or consolidating PBSs (which would mean a single legal sector supervisor; presumably the SRA), it also suggests that a new organisation could be created to supervise all legal and accountancy sector firms, with a further alternative being that a single body takes over AML supervision across all sectors.

No preference has yet been expressed by HM Treasury – but as we noted:

“Of the four models proposed in this consultation paper, … consolidation of the existing supervisors would make most sense for the legal sector; industry expertise is really important when assessing the regulated community’s approach to implementation and sector-specific know-how could be lost if there were to be one single supervisor.”

You can find the full Legal Futures article here.  

High-risk third countries list updated

The list of high-risk third countries contained at Schedule 3ZA of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”) has been updated, following an amendment implemented by The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2023.

Cambodia and Morocco have been removed from the list on the MLRs, meaning that firms no longer need to apply enhanced due diligence for any transaction or business relationship involving a person established in one of these countries (unless it involves one of the other circumstances listed in Regulation 33(1), such as a PEP).

SRA guidance on the Proceeds of Crime Act (POCA)

Published on 29 June 2023, this guidance on POCA was published for all SRA-regulated firms and those working within them in order to increase understanding of the regime and the SRA’s expectations for how to comply with it.

POCA applies to everyone in the UK, regardless of whether a firm falls within scope of MLRs. The guidance sets out what a good framework looks like to avoid POCA breaches for firms outside of the AML regulated sector (and asks readers to refer to the LSAG guidance for in-scope work).

A useful summary of the principal offences, an explanation of suspicious activity reporting and tips on measures that firms can take are contained within the guidance, along with some helpful case studies. However, as Andrew Donovan of the Compliance Office commented in a Legal Futures article that there is an “inevitable conflict with this guidance and some of the SRA’s own rules and guidance”, such as where the guidance encourages law firms to make suspicious activity reports to the National Crime Agency even in circumstances where their work has been specifically carved out from the legal obligations to do so, which is somewhat incongruous with the duty to only disclose confidential client affairs where required or permitted to do so by law.

Small firms dominate Suspicious Activity Reports (“SARs”)

On the subject of POCA, it has been reported that 70% of the 24 SARs sent by the SRA to law enforcement involved sole practices or law firms with 10 or fewer fee-earners. The majority of these related to conveyancing.

The figure was shared by the SRA's money laundering reporting officer, Sara Gwilliam, in her annual report at an SRA board meeting in June 2023. In fact, transactions potentially involving money laundering worth over £75 million were referred to the National Crime Agency by the SRA in the last financial year, with a further 359 investigations relating to potential money-laundering, terrorist financing or sanctions-related risks were flagged for monitoring.

Restriction of options for those refused a licence to breach prohibitions imposed by financial sanctions

On 26 July 2023, the Office of Financial Sanctions Implementation (“OFSI”) amended Section 6.12 of its Financial Sanctions General Guidance relating to options available following a rejected licence application.

A licence is a written permission from OFSI allowing an act that would otherwise breach prohibitions imposed by financial sanctions, as provided for by the Sanctions and Anti-Money Laundering Act 2018. This includes, for example, fees for the provision of legal services (as a general rule, acting for or providing legal advice to a designated person without an OFSI licence is actually allowed, but payment for that advice without first obtaining an OFSI licence is prohibited).

If OFSI refuses to issue a licence, options exist to challenge that decision, such as making a fresh application with new evidence or bringing it to court. However, a recent amendment removed the option to request from OFSI a review of its own decision. The reason for this is unknown, but it means that firms who have been refused such a licence have even more limited routes to overturn that refusal.

Perhaps this represents a trend of OFSI wishing to achieve further efficiencies. OFSI released a blog on 12 July 2023 confirming that it will no longer follow its temporary measure to engage with applicants who submit incomplete applications for licences, instead following its General Guidance and simply returning them to applicants for re-submission. This, OFSI says, “will reduce delays and ensure a timely service can be provided for all applicants”.

OFSI General Licences allowing payment by designated persons

Continuing on the theme of sanctions, OPSI issued a Prior Obligations General Licence on 24 May 2023 (expiring at 23:59 on 21 November 2023), allowing a UK person to receive payment, where they are owed funds or economic resources by a designated person under a contract that was signed before the designated person was designated.

This is subject to some further terms contained in the General Licence, which include:

• The payments have to be for the benefit of a UK person;
• The maximum value permitted for payments is £200,000 (including VAT);
• No other UK person can use the General Licence to receive funds or economic resources arising from the same contractual obligation;
• It must be an ‘eligible’ contract type.

However, note that professional legal fees and/or expenses are ineligible under the Prior Obligations General Licence, but may instead be authorised under the Legal Services General Licence which was renewed in April 2023 (expiring at 23:59 on 28 October 2023), provided the terms of that General Licence are met. Some of the changes from the previous version of the Legal Services General Licence include:

• Legal fees caps and expenses caps have been reset. The legal fees cap is now £500,000 including VAT and the expenses cap is 5% of legal fees, up to a maximum of £25,000;
• Where total fees and/or expenses exceed the caps, the General Licence may be used to start paying the outstanding amounts, but a specific licence application will need to be made for the balance exceeding the cap;
• Cases involving defamation or malicious falsehood are not permitted under this General Licence, but may be considered on receipt of a specific licence application on a case-by-case basis.

Firms or legal practitioners who rely on Legal Services General Licence must provide a report to OFSI, due within seven days, at the earliest point of either the services being completed or the licence coming to an end. Records of its use must be kept for six years.

UK lawyers restricted from advising in transactional/non-contentious matters for those tied to the Russia regime

New regulations came into force on 30 June 2023 which limited the ability of UK law firms and lawyers to act for / advise individuals and businesses tied to the Russian regime, even where they have no underlying nexus with the UK.

For more information, see our recent blog on the subject.

This update provides a brief overview of the key developments to have taken place over recent months 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.

Further information

If you have any questions regarding this blog, please contact Julie Norris and Alfie Cranmer in our 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.

Alfie Cranmer is an associate in the firm’s Regulatory team. He specialises in advising regulated professionals who are subject to investigations and disciplinary proceedings in the legal, finance and healthcare sectors.