Invest in due diligence for dubious schemes (Part 2)

Two years ago the SRA published a Warning Notice outlining their findings in their Risk Outlook and Thematic Report.  Our previous post discussed the need for firms to take the time to properly conduct their AML procedures as law firms were being targeted as host bodies for dubious or fraudulent schemes.

Within the SRA's previous review of 40 cases, it was found that in 63% of cases, due diligence conducted by the relevant solicitor was inadequate, and in 20% of cases no checks had been carried out at all.  That investigation led to seven firms being intervened and 20 referrals to the SDT.

It has now been reported that in 2022, the SRA carried out 273 inspections and desk-based reviews of solicitors and law firms.  51% were found to be partially compliant with their AML obligations and a further 18% fully compliant.  That still leaves nearly a third of all inspected firms which were found to be non-compliant.

Further, the SRA investigated 252 reports of suspected regulatory breaches and instances of suspected money laundering.  They found:

• 49 failures to carry out or complete initial customer due diligence (CDD)
• 40 failures to carry out a money laundering risk assessment
• 39 failures to carry out a source of funds check
• 28 failures to identify a client
• 26 failures to have proper AML policies, controls and procedures (PCPs)

Of the 36 selected suspicious activity reports (SARs), the SRA found that:

• 66% of SARs did not include glossary codes as recommended by the National Crime Agency (NCA)
• a quarter of defence against money laundering (DAML) SARs did not describe the criminal act that firms were seeking a defence against
• a quarter of firms did not include their contact details

A total of 29 fines were issued amounting to £286,976, with a total of £92,500 in fines coming from eight cases at the Solicitors Disciplinary Tribunal (SDT) (compared with the £870,000 in fines that were issued within the 5 years before the Thematic Report).

Money laundering remains mainly prevalent in conveyancing transactions which accords with the trend that conveyancing continues to be the largest area for professional negligence actions against solicitors.

With reports of a long recession on the horizon law firms need to be even more aware of potential attacks.  The SRA's annual AML report provides guidance for firms.