Compliance with the money laundering regulations – firm risk assessment
Issued on 7 May 2019
This document is to help you understand your obligations and how to comply with them. We may have regard to it when exercising our regulatory functions.
Who is this warning notice relevant to?
This warning notice is relevant to all regulated persons and firms who have a legal obligation to ensure that they do not facilitate money laundering or terrorist financing.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("the money laundering regulations") place obligations on those firms that are at risk of being used to launder money.
We will be keeping this warning notice under review, adding in further points as our work with firms indicates areas where firms and the profession need to do more to comply with their obligations.
The SRA mandatory outcomes
You must have regard to the specific outcomes under the SRA Code of Conduct 2011 Outcome 7.5 – to comply with your legal obligations under the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the money laundering regulations.
Your firm must have appropriate policies and procedures in place to protect it from being used for money laundering or terrorist financing (Outcomes 7.2 and 7.3) and (regulations 18, 19, 20 and 21 of the money laundering regulations). The firm’s risk assessment should form the backbone of your policies and procedures to prevent money laundering.
The SRA has a responsibility as an anti-money laundering regulator to make sure those we supervise meet the requirements in legislation and have appropriate policies and procedures in place to prevent money laundering. Updated regulations to prevent money laundering were introduced in 2017 and we are seeing high levels of non-compliance with the regulations, and that firms have not updated their policies since the new regulations came into force.
We undertake proactive monitoring to prevent and detect money laundering, including thematic reviews; one in 2017 when the updated money laundering regulations came into force, and more recently in 2018 a thematic review into firms acting as trust and company services providers (a high risk area for money laundering). It is clear from our work that many firms have not implemented the new requirement to have a firm-based anti-money laundering risk assessment in place.
Preventing money laundering is a high priority risk for the SRA. Money laundering allows criminals to change dirty money into clean assets and funds that have no obvious link to criminal activity. This can undermine the stability of our financial markets and the integrity of the legal services sector. Solicitors and law firms are in a position of privilege and act as gatekeepers to assets and markets that are tempting to criminals, so we expect the profession to do everything possible to avoid enabling financial crime.
Regulation 18 of the money laundering regulations requires that firms must take steps to identify the risks of money laundering and terrorist financing that are relevant to them. Your risk assessment must be in writing, kept up-to-date and provided to the SRA upon request. As part of the risk assessment, you must consider your level of risk arising from your:
- Countries or geographic area of operation
- Products or services
- Transactions and
- Delivery channels.
We are seeing too many firms that do not have a risk assessment in place. Of those firms that do have a risk assessment, many do not fully cover each of the risks that must be considered. Our 2017 thematic review found that only 11 firms out of the 50 we visited had a risk assessment in place, and our more recent 2018 thematic review also found a high level of firms (24 out of 59) had inadequate risk assessments, including some (four) still not having one in place. The anti-money laundering risk assessment is an important part of the regulations and failure to have one could mean that your firm could unwittingly be used to launder money.
Of those risk assessments that are in place, we are seeing that many do not take into account the minimum risks that the regulations require firms to consider. In particular we are seeing a high number of risk assessments that do not consider factors relating to doing business with clients from high risk jurisdictions. Firms also did not consider their transactions or the delivery method of their services.
For the avoidance of doubt, failure to have a money laundering risk assessment in place for your firm is a significant breach of the money laundering regulations and potentially serious misconduct. Where we see misconduct, we will take robust enforcement action.
We have produced a sectoral risk assessment, setting out where we see high levels of risk for lawyers.
You can also read our approved legal sector anti-money laundering guidance.
For advice you can call our professional ethics helpline for solicitors.