SRA warns firms against charging for money laundering checks

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SRA: most firms had a “positive attitude” to compliance

Law firms that charge clients for money laundering due diligence checks are at risk of breaking the rules, the Solicitors Regulation Authority (SRA) has warned.

The SRA said law firms were legally required to carry out client due diligence (CDD) checks under the money laundering regulations.

In a report on anti money laundering (AML) published yesterday, the regulator went on: “It is our view that the cost of undertaking CDD cannot therefore be treated as a disbursement, since it is not a cost incurred on behalf of the client.

“Firms will be at risk under outcome 8.1 if CDD payments are described in their bills to clients as disbursements. As a general rule, we would expect such charges to form part of a firm’s overheads.”

However, the SRA added that there “may on occasion be circumstances” where the cost of the due diligence was “particularly high”, for example where the firm had to carry out an overseas company search, and firms may want to agree with their clients that it should be paid for.

The report was based on visits by the SRA to over 250 law firms, large and small, to check the processes they had in place to guard against money laundering.

The SRA found that “most of the firms” visited had effective AML compliance frameworks in place. It also found that, in general, firms and staff displayed a “positive attitude” to compliance and were “trying hard to meet their duties and obligations”.

While the report found a generally “adequate application” of due diligence, it highlighted a “lack of knowledge and understanding” of when and how to establish a client’s source of funds and source of wealth, with “some firms failing to distinguish” between the two.

“We identified that in most cases fee-earners were making enquiries of clients in respect of their source of funds and source of wealth. However, the client’s response was often taken at face value, with no request for any supporting documentation or corroborating information.”

Further weaknesses identified by the report were:

• A varying level of visibility and support for money laundering reporting officers (MLROs) in firms. Some firms lacked a deputy;
• In several cases, an “inexperienced or inadequately trained” MLRO had a “detrimental effect” on the firm’s compliance;
• Weaknesses in reviewing AML policies; and
• Lack of training for finance staff

Paul Philip, chief executive of the SRA, said: “Our analysis shows that the vast majority of the firms we visited take their responsibilities seriously and compliance is good. But of course, this report is just a snapshot and the challenges are evolving, so there is no room for complacency.

“Firms need to remain vigilant and keep up to date. We will continue to work with all the relevant authorities to play our part in tackling money laundering and we will take firm action where we find issues.”

In his foreword to the report, Mr Philip argued that any “perception of a conflict of interest” between regulation and representation in the legal sector could undermine public confidence.

“Although we operate independently, our status as part of the Law Society, which represents solicitors and their interests, is thrown into sharp relief in this difficult area.

“Truly independent regulation is all the more necessary as the need to fight corruption and money laundering becomes ever more important.”

This is a view with which the Treasury appears to have some sympathy, as we reported earlier this week.