Financial crimes operate on a plane where legal systems and financial systems intersect with business organisations. Due to this reality, some professions are more vulnerable to money laundering by the sheer virtue of their area of specialisation.
Both accountants and lawyers are at heightened risk of AML/CTF violations. Clients, especially offshore entities of questionable provenance, can misuse innocuous services like conveyancing, and client accounts for money laundering.
A recent report in the UK from the Treasury Department highlights this angle of deficiencies existing within the current AML/CTF regulations. The report established that at least 12% of professionals supervised by AML authorities were at risk of non-compliance.
A Brief Overview of the Treasury Report
The UK Treasury report focuses on the activities and performance of AML/CTF supervisors tasked with monitoring firms most at risk of financial crimes. This includes supervisors from statutory bodies like the Financial Conduct Authority (FCA), the Gambling Commission, Revenue and Customs (HMRC), as well as Professional Body Supervisors (PBSs).
The PBSs are drawn from over 22 associations revolving around accounting, legal, and notarial services. Of these, nine legal sector bodies oversee and supervise a total cohort of 8,737 entities, comprised of roughly 60% firms and 40% sole practitioners.
Based on the figures from 2019-2020, the Treasury Report classifies 12% of all supervised entities as “high risk.” Keep in mind that this includes firms supervised by statutory bodies like the Gambling Commission, which operates in an area that is inherently considered “high risk” for money laundering.
When we focus solely on the numbers from professional bodies, the “high risk” firms account for 6.5% of the total supervised population – around 565 legal practitioners across the UK. Another 23% were categorized as “medium risk,” adding a more sizable figure of 2009 to the number of legal professionals/firms potentially vulnerable to financial crime syndicates.
The supervisors subjected roughly 524 legal service entities to desk-based reviews and a further 436 to on-site visits. Approximately 160 of these entities were found to be non-compliant – around 16% of all entities actively scrutinized by the supervisors.
Wider Implications of the Results for ALM/CTF in the UK
There is little doubt that the UK has one of the most robust regulatory systems in place to combat financial crimes and money laundering. This has been categorically stated by the Financial Action Task Force (FATF) in its 2018 mutual evaluation report of the UK AML/CTF regime.
And they have been constantly improving and updating those systems, under advice from the FATF. In 2019, the British Government launched an ambitious Economic Crime Plan in close partnership with the private sector.
A 2021 review of the Plan indicated that out of the 52 originally planned actions, they had managed to deliver on 20. But the numbers from the Treasure Report from the same timeframe indicated that there were plenty of vulnerabilities in the system, especially revolving around the adoption of a risk-based approach to AML/CTF as opposed to a traditional checklist approach.
How a Risk-based Approach is Making a Meaningful Difference
Strategic Priority No:5 of the Economic Crime Plan revolved around the concept of risk management and risk-based supervision. Several measures were adopted to improve the utilization of a risk-based approach to AML supervision by the government bodies.
With a focus on increased intelligence sharing, AML supervisors have adopted this approach in monitoring large populations with relatively modest manpower resources. They have been supported in this endeavor by agencies like the Office for Professional Body Anti-Money Laundering (OPBAS).
To supervise the 42,300 obliged entities, the professional body supervisors have a combined staff of 108 – 67 in accounting and 41 in legal. A targeted approach is essential to have any measurable impact on AML/CTF compliance reporting here.
Not surprisingly, the statutory supervisors had the best understanding of risks in their target cohorts. Next best on the list was the Solicitors Regulation Authority – the lawyer’s body overseeing around 90% of the legal professionals in the country.
Implications for Legal Professionals
Among the legal and accounting service entities found in breach of AML regulations, the supervisors identified the following key factors:
- Lack of adequate documented procedures and policies
- Lack of customer due diligence/enhanced due diligence, especially related to Politically Exposed Persons (PEPs)
- Lack of minimum required AML training for staff
- Lack of adequate risk assessment, both firm-wide and client-focused
The fourth point is of considerable significance. Apart from costly fines for non-compliance, firms can end up in considerable legal jeopardy if they get involved in money laundering schemes of high-risk clients. Early detection and avoidance are crucial here.
A proactive, risk-based approach can deliver positive results not just for AML supervisors, but also for the firms they are monitoring. In the UK, solicitors and legal professionals can rely on official resources like the National Risk Assessment and the SRA Risk Outlook to make more informed decisions in their practice.
The same also holds for legal professionals and firms in other countries that follow FATF guidelines. Look at the latest measures and updates from national regulators and implement the same in your practice. AML/CTF regulations are getting stringent with each passing year – professionals in “high risk” fields must adapt to the changing compliance landscape.