The Solicitors Regulation Authority (SRA) has released its latest AML (Anti-Money Laundering) Annual Report, and it’s a must-read for law firms serious about staying compliant. The report offers valuable insights, highlights areas of concern, and provides clear guidance to ensure firms meet their obligations under the Money Laundering Regulations (MLR).

If you haven't already read the SRA’s AML Annual Report, now is the time! By reviewing it, you can better understand the SRA’s expectations, spot potential gaps in your firm’s compliance, and refine your policies using real-world data.

AML Compliance: The Scope and the Challenge

The SRA’s report highlights that as of April 2024, nearly two-thirds of law firms under their regulation (around 5,683 firms) fall within the scope of the MLR. This shows just how integral AML compliance is to the sector. With an estimated £100 billion laundered through the UK each year and over 4,500 organised crime groups active, the legal profession remains a significant target for those seeking to misuse its services.

The Numbers: Compliance, Enforcement, and Fines

In the past year, the SRA ramped up its proactive AML engagements, increasing from 273 in the previous year to 545. The results were mixed:

• 22% of firms were fully compliant.
• 55% were partially compliant.
• 23% were non-compliant.

As a result, the SRA issued 70 enforcement actions, including 44 fines totalling £556,832. But instead of focusing on what’s going wrong, let’s take a moment to recognise that most firms are trying hard to do better.
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What’s Improving?

It’s clear that no law firm willingly facilitates money laundering. Most firms understand the gravity of the crime and are working hard to protect their services from criminal misuse. There have been significant improvements, but there are still key areas firms need to focus on.

Risk Assessments: A Continuing Challenge

• Client and Matter Risk Assessments: These are required under the MLR, yet 19% of cases reviewed were missing these assessments.
• Firm-Wide Risk Assessments (FWRA): Even though this requirement has been in place for seven years, 10% of the reviewed FWRAs were still non-compliant. The SRA has stressed the importance of data in these assessments, such as how many Politically Exposed Persons (PEPs) you act for, the percentage of work falling within the MLR, and the number of Suspicious Activity Reports (SARs) submitted.

Source of Funds (SoF): A Common Pitfall

Perhaps the most significant issue firms face is with Source of Funds (SoF) checks. The SRA found that 25% of cases lacked adequate evidence of SoF checks. Many firms either relied solely on bank statements or did not make checks for long-standing clients.

It’s not enough to simply collect documents—you need to follow the money and understand its origin. The SRA recommends verifying SoF early in the client relationship and ensuring there is a clear audit trail.

Client Due Diligence (CDD): Avoiding Shortcuts

Incomplete CDD, especially for corporate clients, was another issue flagged in the report. The SRA found missing verification documents in 5% of the files they reviewed. Even for long-standing clients, firms need to avoid taking shortcuts and ensure proper documentation is obtained.

Simplified Due Diligence (SDD) and Reliance

Many firms are confused about when SDD can be used or even if they should allow it at all. If your firm does not allow SDD, make sure this is clear in your AML policy to avoid confusion. The same goes for reliance—relying on another professional’s CDD for the client. Reliance can be risky, so it’s essential to have a clear policy in place to manage it properly.

Long-Standing Clients: No Exceptions

There is no provision in the MLR to waive CDD requirements for long-standing clients. If you have any lawyers resisting checks because they ‘know’ the client, point them to page 58 of the Legal Sector Affinity Group guidance (section 6.2), which clearly states that long-standing relationships do not exempt them from the rules.

Upcoming Focus Areas

Looking ahead, the SRA has announced they’ll be focusing on SoF which will be its next Thematic Review. The SRA will be visiting firms and asking for summaries on source of funds for the files they are reviewing. Ensure that all documentation is in place and that your firm’s risk assessments are clearly documented.

Training: The ROLE Model

If you haven’t already read the SRA’s thematic review on AML training, now is the time. The SRA has introduced the “ROLE” model for training, which recommends that it should be:

• Relatable
• Ongoing
• Supported by leadership
• Engaging

The SRA even provided a checklist to help firms meet these criteria, which can be found here.

Final Thoughts

The SRA’s AML Annual Report is more than just a document—it’s a roadmap for staying compliant and protecting your firm. By addressing the key issues highlighted and preparing for upcoming SRA visits, you can ensure that your firm is ready for the challenges ahead. So, take the time to read the report, review your policies, and make sure your team is on the same page.  As visits increase, it’s no longer a question of if your firm will be visited by the SRA, but when.

Let’s continue to work together to protect the legal sector from the risks of money laundering!