SRA Sectoral Risk Assessment
As most firms will be aware, the SRA is continuing with its programme of AML monitoring visits and is seemingly reporting faults more often than not. Those wanting to understand the regulator’s mindset in what they are doing in this aspect of their responsibilities might find it helpful to consult the SRA’s updated risk assessment which they, in common with all law firms that are regulated by them, are obliged to produce and update under the Money Laundering Regulations 2017.
This all comes against the backdrop of a growing number of reports of substantial fines having been imposed on firms both large and small for breaches of the Money Laundering Regulations. These have included a fine of £19,383 against a firm in South Wales where shortcomings in the CDD processes contributed to losses caused by a vendor fraud and a Northumberland firm that was fined £12,772 for not having had a documented risk assessment in place, as required by r.18 of the 2017 regulations until 2022. It was also reported in the Gazette that a Bristol based firm had been fined £23,000 on the basis that five files had been found to have had no client or matter risk assessments on them, and a Berkshire firm was fined £16,000 for what was described as its “reckless” non-compliance with the requirements. Meanwhile, at the other end of the sector, Clyde & Co were fined the eye-watering sum of £500,000 by the Tribunal for not having maintained its ongoing monitoring processes in relation to its work for a large shipping concern.
Non face-to-face meetings
Against this very worrying backdrop, the updated SRA report makes a number of points that should be carefully noted by firms and taken into account by them where appropriate. The first of these concerns the increasingly common situation where the client’s instructions are not taken at a face-to-face meeting – an issue that has caused some confusion of late. The main situations where enhanced due diligence is required at r.33(1) of the 2017 regulations do not list remote client meetings as requiring enhanced due diligence directly, but there is a need to do so where the firm has been advised that this will be the case through information that has been made available to them by their supervisory body.
On these grounds it would be as well to interpret these comments in the revised risk assessment as amounting to a requirement for EDD to be conducted, and more care should therefore be required to onboard the individual client who is not met in person as opposed to one who attends the office. It would seem fair, however, to see the on-line video conferencing meeting that most firms will now undertake in such situations as amounting to the additional steps that will satisfy this requirement.
Supply chain risks and PEPs
Another comment to catch the eye is that relating to “supply chain risks” where the firm will find itself working alongside other professionals or in one aspect of a wider legal matter. This rather unfamiliar term is explained to be “the end-to-end actions or activities that will be involved in the end product or service to the client”. The SRA stresses that the firm should look beyond its own instructions and to make efforts to “understand the totality of the transaction and identify the risks”.
Other warnings include that too many smaller firms are thought to be taking an “overly simplistic approach to risks associated with politically exposed persons and higher risk jurisdictions”. This is despite, or perhaps because, the great majority of high street firms will never have encountered a PEP in the past, and will be unlikely to be exposed to PEPs or any higher risk jurisdictions in the future. It is, however, conceded that firms must decide their own “risk appetite” on this issue and under prompting from the SRA in this regard many firms will now routinely conduct an e-verification check on all clients, not just to screen for PEP status but now also the strict liability risks in relation to sanctions listings as well.
So far as PEP status is concerned a change was made early in the new year to the effect that domestic PEPs could be dealt with as presenting a lower risk profile than any who are non-domestic. The report concedes, however, that until the FCA provides interpretive guidance on what this might mean in practice, later in the year, firms will have to decide for themselves what this distinction should mean for them in practice.
The link to property fraud
Finally so far as AML risks are concerned, the risk assessment makes an interesting link between property fraud and money laundering. As one of the above cases illustrates, the scourge of vendor fraud has not gone away even if the string of cases that led to the Court of Appeal cases in Dreamvar v Mishcon de Reya and Purrunsing v A’Court in the middle of the last decade are no longer making the legal news. So far as the SRA is concerned, however, where a vendor fraud is achieved by the criminal the funds will have passed through two client accounts, and as such they will represent the proceeds of crime since they represent criminal property. Already hard-pressed conveyancers will have to hope that this will not present yet another unwelcome risk in their activities by opening up the threat of disciplinary action for AML breaches where they have become one of the firms that have been unfortunate enough to have been caught up in any such situation.
Proliferation risks
A final word on proliferation risks – the fear of involvement with or for a client who is engaged in the development or trade of nuclear or other weapons of mass destruction. This is, of course, a very slim risk for the great majority of firms but those dealing with farmers and the agricultural sector should beware. Not only do the controls relate to materials for use in such weapons but “dual-use goods” as well – those not manufactured as weapons but which could be used within them, and so on this basis including agricultural fertilisers. Presumably, therefore, those working with this sector should be wary of any involvement in the large scale trade of any such materials. You have been warned.