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Article | Risk Management Matters – Legal PI

How to manage anti-money laundering risks for your law firm in uncertain times

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Joanne Cracknell | May 27, 2020

The Solicitors Regulation Authority (SRA) appreciate that law firms are facing uncertainty during this challenging time.

We are all facing challenging times with the coronavirus pandemic (Covid-19) and while the Solicitors Regulation Authority (SRA) have stated they appreciate law firms are facing uncertainty and difficult business conditions as a consequence of the virus, the SRA has also highlighted their expectation that solicitors continue maintaining the high standards of service expected by members of the public.

Over the last few weeks the SRA and the Law Society have issued a number of guidance notes1 to help law firms navigate their way through this turbulent time. Businesses have been putting into practice their contingency plans to assist with minimising disruption being caused by Covid-19 in order to continue running their businesses and providing a proper standard of service to their clients.

Criminals will seek to take advantage of the pandemic and may try to exploit any vulnerabilities

Criminals will seek to take advantage of the pandemic and may try to exploit any vulnerabilities in anti-money laundering systems because businesses and individuals focus is elsewhere. The SRA’s latest guidance looks at some concerns that law firms may have about money laundering risks in the current climate.

Long term absences of key officers

Queries have arisen regarding staff illnesses as a result of Covid-19, and in particular, in the event that a law firm’s money laundering reporting officer (MLRO) and/or their money laundering compliance officer (MLCO) falls ill. Law firms should have measures in place to deal with absences of these officers and many will have appointed individuals to deputise in these circumstances. However, if your MLRO and/or MLCO is unable to fulfil their role as a result of being on long term sick leave then the SRA needs to be notified in writing within 14 days of the change in circumstances.

If the MLRO/MLCO are the same person as the Compliance Officer for Legal Practice (COLP) or the Compliance Officer for Finance and Administration (COFA), the SRA’s Authorisation of Firms Rules2 (Authorisation Rules) stipulates that law firms must have a designated COLP and COFA.

Should either compliance officer not be able to fulfil their role, then you can apply to the SRA for temporary approval of a compliance officer in accordance with Rule 15 of the Authorisation Rules.

Client Due Diligence

Despite the pandemic, law firms must still comply with their anti-money laundering obligations and conduct client due diligence (CDD) as set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 20173 and the Money Laundering and Terrorist Financing (Amendment) Regulations 20194 and in accordance with Rule 8.1 of the SRA Code of Conduct for Solicitors5.

However, the SRA have agreed you can comply by using other means for identifying and verifying clients such as via a telephone call, video conferencing and/or by email. Whatever process you use, it is recommended that the decisions made to satisfy CDD procedures are documented, signed and dated. In the current climate it is appreciated that there may be a requirement to conduct enhanced due diligence (EDD) on a more frequent basis because of solicitors working remotely and are not able to meet their clients face to face.

Many law firms use electronic verification providers to assist them with EDD procedures, but the reports produced only confirm the existence of an individual. If during the due diligence process there is anything that makes you question whether the client is who they say they are then further EDD should be conducted. Remember, that in the event that you are not able to adequately establish and verify a client’s identity, then you should not proceed with the transaction.

Do not forget that section 4.9 of the Legal Sector Affinity Group (LSAG) Anti Money Laundering Guidance for the Legal Sector6 helpfully sets out in detail the sources of identification verification to be considered when establishing a client’s identity. The LSAG has also produced some guidance on how to prevent money laundering during the pandemic7. A copy of the guidance can be found here.

FATF has recently published guidance concentrating on digital ID8 and when it is appropriate to use such systems to conduct CDD. The key factors to consider are whether the electronic verification system is reliable and independent. By assessing the technology, architecture and governance of the system will help users to determine whether the electronic verification provider is a suitable source for conducting CDD (FATF, p.6-7).

The key to ensuring compliance during these unprecedented times is to ensure your policies and procedures have been updated to reflect the current working practices, including the firm wide risk assessment. Remain vigilant and be mindful of the red flag warning signs of money laundering and report any suspicions to your MLRO.

We understand that the SRA will be issuing further guidance on the risks law firms are facing during these unprecedented times.

Footnotes

1 Solicitors Regulation Authority. (2020). Help with common compliance queries. Retrieved from https://www.sra.org.uk/sra/news/coronavirus-qa/ and Law Society. (2020). Coronavirus (Covid-19) advice and updates. Retrieved from https://www.lawsociety.org.uk/support-services/advice/articles/coronavirus-covid-19-advice-and-updates/

2 Solicitors Regulation Authority. (2020). The Authorisation of Firms Rules. Retrieved from https://www.sra.org.uk/solicitors/standards-regulations/authorisation-firms-rules/

3 http://www.legislation.gov.uk/uksi/2017/692/made/data.pdf

4 http://www.legislation.gov.uk/uksi/2019/1511/made/data.pdf

5 Solicitors Regulation Authority. (2020). SRA Code of Conduct for Solicitors, RELs and RFLs. Retrieved from https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/

6 Legal Sector Affinity Group. (2018). Anti Money Laundering Guidance for the Legal Sector. Retrieved from https://www.sra.org.uk/globalassets/documents/solicitors/code/lsag-anti-money-laundering-guidance.pdf

7 Solicitors Regulations Authority (2020). Covid-19 and preventing Money Laundering/Terrorist Financing in Legal Practices. Retrieved from: https://www.sra.org.uk/solicitors/resources/money-laundering/money-laundering/covid-19-preventing-money-laundering-terrorist-financing/

8 Financial Action Task Force. (2020). FATF Guidance on Digital Identity in Brief. Retrieved from https://www.fatf-gafi.org/media/fatf/documents/reports/Digital-ID-in-brief.pdf

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Joanne Cracknell
Associate Director - Finex PI UK Legal Services

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