Welcome to the latest update on all things compliance! Spring is definitely in the air & the SRA have been rather busy 🐝🐝🐝 these last few months (which also means so have we!)
We are currently knee deep in AML audits as many of you have taken us up on our recent offer of a 10% discount. We have decided to extend this for anyone who books an audit by 30th April 2023. The SRA literally now have a whole department solely committed to carrying out AML checks and they will likely eventually get to all firms subject to the Regulations. So before they come knocking on your door, let us come virtually knocking and make sure you’ve got everything ship shape! Get in touch for more information on how we can help or take a look on our website.
🔥 Hot topics
A reminder: changes to the Legal Ombudsman timescales came into force on April 1st. To prevent an issue with rule 8.3(c) of the SRA Code of Conduct for solicitors all law firms should by now have updated their complaints information on their website and anywhere else where the Ombudsman deadlines are referenced e.g.:
- client care & terms of business;
- complaints policy;
- current complaints handling correspondence.
The Ombudsman have helpfully (if somewhat belatedly!) published template wording which firms can make use of. The SRA have finally updated their own suggested wording for complaints information which should appear on a law firm’s website.
SRA diversity survey launched with all law firms being required to again survey their staff by the summer of 2023. The precise deadline has not been announced yet. This is a mandatory exercise. As a reminder, it involves sending all staff a survey (in a format which regrettably the SRA changes every time they roll out this exercise!) and then logging into the SRA to report on the results. Publishing the results is encouraged but should not be done in smaller law firms due to the risk of someone being identified. Interestingly this year the SRA is encouraging firms to use an identifying number or similar for the surveys rather than making it anonymous. Given the sensitivity of some of the information sought that instinctively feels unwise in all but the largest most IT sophisticated law firms. Our retainer clients will again be able to make use of our diversity anonymous survey tool without any additional charge. This will allow you to launch the survey to your users on the platform and report anonymously on the data gathered in order to upload to the SRA later in the year. We have updated the questions and are just running some tests before rolling out. Watch this space.
Following a thematic review, the SRA believe that law firms need to do more on SLAPPs (strategic lawsuits against public participation). A ‘SLAPP’ typically refers to some sort of legal threat or action intended to stifle public commentary or publication and we talked a little about SLAPPS in our last update. The SRA have since carried out a review of 25 firms and while they did find some good practice, there were areas of concern including some solicitors not being aware of the latest guidance on conduct in disputes, a lack of policies and procedures for this work or specific training for fee earners on how to conduct fair and appropriate litigation. The concern being that these all increase the risk of firms falling short of expected standards so please make sure you don’t get caught out here. Essential reading for litigators.
💰 Anti-money Laundering
LSAG have published guidance on Chinese underground banking and funds from China. It appears they are providing advice on the $64,000 question we’ve all wanted answered which is do I need a DAML (Defence Against Money Laundering request) if the source of funds and wealth is “clean” but there was a misrepresentation on the paperwork to the Chinese authorities. One school of thought historically had been that, although there are no equivalent UK laws against taking money out of a jurisdiction, lying to an authority for financial gain might constitute fraud which of course would be a crime in the UK. But the Law Society guidance now leans in the opposite direction it seems. Here are a couple of the key statements made:
“The UK Financial Intelligence Unit (UKFIU) does not advise for or against submitting SARs or defence against money laundering (DAML) SARs where overseas currency laws have been broken.”
“Legal sector supervisors would not necessarily expect firms to make SARs where the only issue is that the purpose of the transaction was misrepresented to the Chinese government. We would, however, expect proper source of funds and/or wealth checks to support a decision not to submit a SAR.”
This final line is key: don’t be lured into a false sense of security by virtue of this updated guidance. Splitting funds into smaller sums and transferring via third parties in a convoluted manner (and indeed misleading authorities) can also be flags for money laundering / proceeds of crime purposes. In practice there may be so many flags associated with the behaviour that you seek a DAML in any event. It will come down to the firm’s risk appetite, knowledge of the client and the individual facts of each case. If you are going to rely upon this more relaxed stance as regards suspicious activity reports where authorities have been misled make sure that you are at least highly confident as to the provenance of the funds. This guidance is essential reading for any lawyers working in property.
Updated guidance from the NCA on requesting a defence to money laundering crimes. Some nice clear guidance from the NCA which will give MLROs in particular some useful context on what the NCA are looking for and how to maximise protection when making a report.
Some interesting AML insights last month from Collette Best, Director of AML at SRA who highlighted 3 things the SRA sees law firms getting wrong in her talk at the Law Society Conference:
❌ The firm has very good AML policies in place but the fee earner handling the matter has not followed those procedures!
❌ There is no evidence or insufficient evidence on file of the firm assessing the risks of a transaction correctly i.e completing their new client & new matter risk assessment. The old one liner checkbox for ‘low/medium/high’ has certainly fallen out of favour!
❌ The firm has obtained documentation on source of funds but has clearly not properly considered the documents received. While firms are not expected to be experts in identifying forgeries the SRA has found examples of people failing to spot really obvious fakes which have typos and poorly replicated logos.
I would also add from our own experience of conducting AML audits for law firms just how important it is to read the source of funds documents provided. Many people seem to struggle to properly assess whether the documents truly demonstrate what they are purported to demonstrate:
⁉️ Do the documents support what you are told about how this individual came to have this money?
⁉️Is there anything obviously off about the documents or what they show?
⁉️ How confident are you that you now know where the money has come from – would you personally take a bet on it with your own money? If not, why not? Think critically.
Source of funds is not just a tick box exercise.
📏 🧭 New rules and guidance from SRA
The SRA have updated their guidance on solicitors trying to operate their law firm without a client account. There’s some welcome clarification on a few points including maintenance of ledgers for client money if not being held in a client account. In addition to this guidance they have issued a warning notice which highlights some key issues with regards to a law firm’s client account being improperly used as a banking facility. The SRA have previously published case studies to help law firms understand the types of instances when paying money into the client account is not acceptable. These have now been updated with additional scenarios to give firms more guidance.
The SRA have finalised their **rules for post 6 – year client protection.** All law firms are required to maintain at least 6 years of ‘run-off’ professional indemnity cover when they close a law firm to cover claims made after winding up. Historically after that point some protection has been afforded to clients, but also to unincorporated business owners, by the Solicitors Indemnity Fund (SIF). The new rules will bring the SIF under the SRA’s control to ensure future consumer protection for post six-year negligence claims. The rules will now be submitted to the Legal Services Board (LSB) for approval, ahead of the new arrangements becoming effective from October this year.
Solicitors undertaking regulated claims management and immigration activities – This guidance actually came out just before Christmas but we are popping it in here, just in case you missed it! Worth a quick read if it applies to you & your firm
😳 Tribunal trends and cases of interest
- Any law firm doing property, corporate, private client, trusts, tax work etc should make the time to read the SRA’s decision to fine Ferguson Bricknell solicitors £20k for AML failings. 💰
It would be easy to self soothe by jumping on the worst of the problems identified with the anti-money laundering approach identified here but frankly many small to medium sized firms are in similar position on a lot of these issues. They also have:
❌ a firm-wide risk assessment in place now which doesn’t adhere to the detail for the SRA’s latest guidance. Relying too heavily on templates without sufficient customisation is another common issue
❌ failed to properly update procedures and spot references to the old regs
❌ gaps on some files’ source of funds records
❌ inadequate new matter / client risk assessments
❌ gaps in AML training records
❌ failed to appreciate that when the AML Regulations say that firms should have an audit function in place to check effectiveness of the AML procedures IF appropriate “to the size and nature of” the business, the SRA seem to oddly interpret that as meaning that every single firm subject to the Regulations should have an audit function in place. Surprised how many property firms out there still haven’t had any sort of AML audit. Reply to this email if you would like some help with your AML audit – a 10% discount for bookings placed in April.
The maximum this firm could have been fined in the early part of last year without going to the Tribunal would have been 2k! These new fining powers are a huge development.
A firm’s failure to have in place a compliant AML practice-wide (firm-wide) risk assessment led to a fine of £1,500 plus £600 costs. The firm did not have in place a compliant AML practice-wide (firm-wide) risk assessment, as required by Regulation 18 of the MLRs 2017.
The MLRs 2017 set out five key risk areas which must be assessed. The firm had not fully assessed, in a risk assessment, any of those key areas as detailed below:
- its customers
- the countries or geographic areas in which the firm operates
- the products or services which the firm provides
- how the firm’s products and services are delivered, and
- its transactions.
SRA Accounts Rules
- This firm received a rebuke for unreliable accounting. They lacked compliant reconciliations and failed to keep and maintain proper accounting systems. This included ledger posting errors which led to shortages in the client account. We cannot stress enough the importance of ensuring your accounts are managed properly.
- A sole practitioner has been rebuked for allowing a shortfall on their client account and failing to promptly return client money.
- A bookkeeper who misappropriated more than £300,000 has been banned from working in law firms.
Conflict of interest
This partner received a whopping £32,000 💰💰 fine after he secretly worked on a deal with his firm on the opposite side!
🎲 Quick rounds of stating the obvious!
1 DON’T BUY DRUGS FROM YOUR CLIENT!
This is definitely not advice we ever expected to be putting in here! However, a barrister has recently pleaded guilty to obtaining drugs from his client. The really tragic part of this case is that the drugs he purchased led to the death of his partner.
2 DON’T GAMBLE USING CLIENT COMPENSATION
Stating the obvious part 2! This time a trainee solicitor who stole more than £100,000 of client compensation to fund a gambling habit has been jailed for two years. Over a 12-month period, he duped various insurance companies out of up to £8,000 a time by giving them his own personal NatWest bank account details instead of those of the firm. In all, he directed £100,437 to his account, claiming to have spent all of the money on gambling. The firm’s partners had to pay out £400,000 to cover losses and a third of its 24 staff were made redundant.
3 DON’T DRINK & DRIVE
And finally, stating the obvious part 3! A solicitor received a 16-month driving ban (to be reduced by 4 months on satisfactory completion of a drink drivers awareness course) and a fine which including costs totalled just under £5,000 after her decision to drive after consuming alcohol led to her crashing into a lamp post.
And on the topic of disciplinary action…. the SRA have released a joint statement with the SDT, to advise their overall approach to referring cases to the Tribunal. In short expect to see less referrals to the independent Tribunal and more fines and larger fines coming from the SRA direct. On the one hand this could be viewed positively: SRA fines are far less stressful and costly than being prosecuted to a Tribunal. However the SRA has now effectively given itself the authority to re-write the benchmark for fining levels and we are already starting to propose fines at levels which we just did not see from the Disciplinary Tribunal. Fines have gone from being a purely academic consideration for most firms to a very real prospect for running into fairly common problems. Just this week we saw the SRA fine a firm £5,000.00 for failing to have its Anti-Money Laundering procedures in the shape the SRA expects.
📰 SRA Consultations
The SRA have just finished a consultation on amendments to the 2019 Standards & Regulations following feedback from stakeholders that the new rules had either unintended knock-on consequences or needed to be clearer on specific issues. There are not enormous changes for the average law firm to be concerned about here are a few key points to watch out for:
- A u-turn on whether law firms are allowed to bill and take money for their costs before they have been incurred. Since the 2019 changes SRA rules and SRA guidance are quite clear that there is not currently a restriction here stating “A firm might wish to consider sending a bill to a client for their anticipated fees and disbursements – i.e. not limited to incurred costs”. In the new rules however it will be made clear that costs must be incurred before they can be classed as office money even if they appear on the bill of costs. The changes are proposed to the controversial definition of client money inserted into Rule 2.1(d) of the 2019 Accounts Rules.
- Clarification that there is no need to send a bill of costs to the client purely to transfer from client account to office funds to reimburse the firm for money spent on behalf of the client;
- Relaxation of some of the rules on record keeping when managing a client’s bank account, such as when acting as a Deputy;
- Relaxation of restrictions on solicitors offering pro bono and administration of oaths services.
The SRA is consulting on new rules which would limit the percentage of damages which solicitors can charge clients in financial mis-selling claims. The rationale as to why one percentage fee in litigation is considered “excessive” in one context despite being a fraction of that charged in another context is not properly explained. Essential reading for anyone working in this space.
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