The fines levied by the SRA on 13 firms in recent weeks continue to demonstrate a fundamental lack of understanding around responsibilities when it comes to the money laundering regulations.
The firms in question had failed to comply with their procedural responsibilities to provide their firm-wide AML risk assessment and delayed their AML declarations.
In another case that earnt the firm in question a “rebuke” from the SRA, the use of third party software had been relied upon to verify the identity of the individual, when in fact, the third party verified only “that the ID documents were true copies of the original documents. It had not however actually verified the genuine identity of (the person in question).”
Such examples serve to highlight the challenges anti-money laundering and Know Your Customer present to law firms.
It is not enough to simply complete identity verification; Know Your Customer is much more about understanding who your client is, why they are undertaking a transaction, how they have come about the funds for their deposit and expenses, and assessing what risk, if any, they pose to the UK’s fight against money laundering.
This is a battle the financial services sector has been grappling with for many years. The banking system led the UK toward financial ruin as seemingly carefree lending paved the way for the financial crash of the late 2000’s.
More stringent lending measures were put in place as a result of the Mortgage Market Review as lenders stress-tested incomes to ensure they were more responsible in their lending.
In a similar way, the money laundering regulations are a stress test for law firms to conduct on their clients. But where financial services are trained to understand the ins and outs of financial transactions, lawyers are not.
“Financial services have a couple of distinct advantages over lawyers:
Access to better quality data, in a form that is much easier to analyse. Lawyers have historically had to work off screen shots and paper bank statements.
A better understanding of the nuances of financial data and paper trials – unsurprisingly as it is their main business.”
Says Mike Ward, CEO of source of funds toolkit Armalytix.
“This lack of understanding and data can fundamentally undermine lawyers’ efforts to comply with the Money Laundering Regulations. Fortunately, the advent of open-banking automation tools has partially answered the data advantage and is someway along the line in providing analysis
“But the second advantage requires training and experience. Lawyers need to take steps to improve the understanding of financial data in terms of what to look for and where to find it.”
For Mike, the key is to follow the money using the information gathered as part of Know Your Customer and source of funds checks to inform your risk assessment and the decision to act or not.
“The money trail will always be the final arbiter in the assessment of money laundering and fraud. Where there is smoke, there is often fire, and if the transaction trail in the bank accounts appears to look inconsistent then there is cause for further investigation.”
“Ultimately the new automation tools are there to help people make an informed decision about risk, whether it’s identity, document, bank verification or source of funds.”
“Ultimately the fines levied by the SRA have not been because the firms in question have enabled money laundering through their action or inaction. Rather, the failures have pointed to a misunderstanding of the role of automation and the firm’s responsibilities in proactively training staff to enable them to complete Customer Due Diligence appropriately, confidently and compliantly.”