- Publication Date
- 2022-10-27
The investigation was carried out following a referral from the AML Proactive Supervision Team, which began as a proactive inspection at the law firm in April 2020. The purpose of the inspection was to assess the law firm's compliance with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017).
The investigation identified areas of concern in relation to compliance with the MLRs 2017. The MLRs 2017 came into force in June 2017, requiring relevant persons to have in place a compliant AML practice-wide risk assessment and AML policies, controls, and procedures (PCPs) to prevent money laundering.
A warning notice was published to the profession in May 2019 (updated in November 2019), highlighting the requirement to have a AML firm-wide risk assessment in place. The law firm incorrectly declared in January 2020 that its firm-wide risk assessment was compliant. This declaration was made in response to an exercise carried out requiring the law firm to confirm whether it had a compliant firm-wide risk assessment under Regulation 18 of the MLRs 2017.
At the commencement of the AML inspection in April 2020, the law firm's AML firm-wide risk assessment was not compliant. The transactional risks faced by the law firm had not been addressed in the documents provided. Additionally, the assessment had insufficient regard for the Legal Sector Affinity Group guidance, the sectoral risk assessment, and the warning notice. Guidance was provided to the law firm at the conclusion of the inspection, which included revising the firm-wide risk assessment to include specific risks the law firm faced thereby strengthening its AML controls.
The law firm did not have a compliant AML firm-wide risk assessment in place until after the AML Proactive Supervision Team sent an outcome letter in December 2020. Thus, the law firm complied with the requirement more than three years after the MLRs 2017 introduced it in June 2017.
The law firm also lacked compliant AML AML policies, controls, and procedures, as required by Regulation 19 of the MLRs 2017. The necessary PCPs were not compliant until after the inspection concluded because essential elements were omitted, including the process to identify and scrutinize complex or unusual large transactions, and the circumstances for applying simplified due diligence and source of funds checks.
The law firm carried out screening of relevant employees only upon their appointment. However, Regulation 21 of the MLRs 2017 requires screening both on appointment and during employment. The law firm had not complied with Regulation 21(1)(c) of the MLRs 2017 to undertake an independent audit. Furthermore, while staff training was reported as implemented, the law firm could not provide a record of what training had been provided and to whom, contrary to Regulation 24(1)(b) of the MLRs 2017. This breach was rectified by May 2022 with a central record now being kept.
A review of sample client files during the inspection highlighted insufficient client identification and verification prior to the commencement of matters. On one file, the fee-earner was unaware of the persons in significant control at the company and had not obtained the necessary identification documentation. On another file, the law firm failed to conduct adequate monitoring and source of funds checks for a transaction part-funded by a mortgage. An up-to-date bank statement was requested only upon the direct instruction from the inspection team.
The issues identified during these client file reviews indicated that source of funds evidence was not collated by fee-earners, putting the law firm at risk of committing an offense under the Proceeds of Crime Act 2002. Additionally, records required under Regulation 40 of the MLRs 2017 were not maintained to reconstruct transactions.
The law firm acknowledged its failure to comply with money laundering legislations by not behaving in a manner that maintains public trust and by not carrying out business in accordance with proper governance and risk management principles.
The situation led to the agreed outcome where the law firm would pay a financial penalty and comply with the required AML regulations moving forward.