New rules, guidance and warnings
We kick off as ever with the latest roundup in the ever changing world of law firm anti-money laundering / financial crime updates:
- Some new countries were recently added (Kenya & Namibia) and removed (Barbados, Gibraltar, Uganda, United Arab Emirates) from the list of high-risk third jurisdictions. The next FATF plenary is likely to report any minute so it’s always best to refer directly to the most up to date list. We like to use the Law Society’s consolidated list so that it’s all in one nice neat place for us!
- The Economic Crime and Corporate Transparency Act will begin its long road to implementation. Changes will include significant changes to the robustness of Companies House. It is not yet clear to what degree this will enable law firms to place greater reliance upon those records than currently but hopefully that will come with time. The Law Society have a helpful update on this topic.
- The SRA has made a tentative start to its thematic review of AML training in law firms. The SRA has previously expressed concerns that some firms:
- are not training staff adequately as required by the Money Laundering Regulations;
- are not keeping adequate records of attendance on courses and / or following up when someone misses one;
- failing to train adequately on enhanced due diligence, identifying red flags, source of funds and reporting matters to the MLRO;
We fully expect that sanctions will be on their radar too now. Our clients will all benefit from access to our recently revamped and expanded course on AML which includes training on sanctions now and some great exercises taking a look bank statements and balance sheets in assessing source of funds. Get in touch if you would like some help – AML training is our love language 😍
- The SRA has updated its ‘sectoral risk assessment’. As a reminder this document is intended to feed into law firms’ considerations of what risks are posed to them, for example within their Firm Wide Risk Assessment. Changes to the sectoral risk assessment do not necessarily mean changes to your own firm-wide risk assessment but it is worth checking in on where the SRA has shifted its focus in case your firm in particular is impacted. The SRA has said that in its new addition it has drawn particular attention to the following new risks:
- vendor fraud
- pooled client funds
- third-party managed accounts
- irregular methods of transferring funds.
Sanctions have also been given their own risk heading, signalling the importance the regulator gives this area. Take a look at the bottom of the risk assessment page for a fully list of the recent changes.
❌Sanctions❌
The SRA have recently written to over 1,000 firms to provide ‘guidance & support’ on complying with the UK’s financial sanctions regime. Data was collected from several firms, revealing a significant number reporting they had inadequate controls in place. The guidance sent included guidance on complying and guidance on completing firm-wide sanctions risk assessments, which includes a template for firms to use.
OFSI have also published / updated several pieces of guidance:
The SRA have warned that they will be carrying out on-site sanctions inspections as well as carrying out desk-based reviews later this year. So make sure you’ve got appropriate controls in place. Do reach out to us if you need any help in this area.
💰% Interest Rates & the Client Account 💰%
A recent Law Society Financial Benchmarking Survey has said that many law firms had been propped up by abnormally high interest rates. In response to this, the SRA have released an update reminding firms of their responsibility to pay interest fairly & that they will take action if they see a firm failing to do so.
Separately there is an interesting debate occurring on whether we need to find an alternative to the current client account in light of the likely massive cost to the profession of the missing £60+ million following the Axiom Ince scandal. A very small number of individuals cost tens of millions of pounds every year through compensation funds payments and regulatory costs. Its such a waste. Surely with today’s technologies we can find a better solution with better safeguards in which is beyond being tainted by the vagaries of a handful of law firms
🛑 SLAPPS 🛑
A recent SRA thematic review has shown that most firms are aware of SLAPP issues, with more than half saying they had changed working practices since the SRA’s 2022 warning notice publication. As a reminder, we are talking about threats of legal action being used as a means to silence critics / journalists without proper legal grounds for doing so. It’s closely connected to the recent warning notices on improper behaviour in litigation more broadly. City firm Osborne Clarke has just been referred to the Solicitors Disciplinary Tribunal over ‘SLAPP’ allegations relating to work for the former chancellor Nadhim Zahawi. Though as we have also seen with the Tribunal recently dismissing all allegations the SRA made against Dentons a referral to the Tribunal alone of course does not mean that anyone has done anything wrong. However, many need to be clearer when instruction third parties. I would encourage all litigators to take a good luck at the SRA’s guidance on abusive litigation and SLAPPs, defamation lawyers in particular.
⬆⚠️High Volume Consumer Claims warning⬆️⚠️
The SRA has recently issued a warning to law firms working on financial product mis-selling compensation claims, about their potential approaches and the need to uphold their professional obligations. This is in the wake of some significant SRA resources being expended investigating concerns raised by a number of banks.
The SRA are concerned about:
- Issues regarding firms getting proper instructions from clients (such as firms starting to act and generate costs before gaining a client’s consent).
- Poor due diligence during client onboarding leading to low quality and/or inaccurate claims being progressed;
- Failures to act promptly or adequately in response to client instructions;
- Levels of supervision in relation to financial services claims when part of high-volume/bulk claim processes involving multiple clients.
Accordingly, the SRA has published a warning notice on high volume financial services (https://www.sra.org.uk/solicitors/guidance/high-volume-financial-service-claims/), and wider guidance for those working in the mass claims sector (https://www.sra.org.uk/solicitors/guidance/claims-management-activity/).
Paul Philip, SRA Chief Executive has emphasised that this is a key area of concern for the SRA. It is interesting to see this concern characterised as a concern in relation to the level of service offered to the clients. Our brief experience to date is that the SRA investigations appear to be far more concerned with concerns raised by opponent banks rather than direct client complaints, which are typically absent. There is also a tension in my view between the SRA encouraging innovation and seeking to promptly dish out fines where a tech led process has not performed perfectly. We have already seen SRA investigations focusing on supervision levels, and those types of investigations are likely to increase given the SRA’s focus on claims management and financial mis-selling activities. It is therefore extremely important for anyone working in these sectors to carefully review these documents, and considers whether any changes to policies, controls and procedures are required. Please do let us know if we can help in that regard.
📜Draft Guidance for In-House Solicitors 📜
An interesting reminder, in the wake of the Post Office scandal and in-house solicitors being scrutinised over their connection to what is thought to be the widest miscarriage of justice in modern UK history. The SRA has produced some draft guidance for in – house solicitors:
⭐Understanding in-house solicitor’s professional obligations as an employer
⭐ Reporting concerns about wrongdoing when working in-house
⭐ Identifying your client when working in-house
⭐ Internal investigations – thought aimed at in-house lawyers this guidance note in particular has wider application.
Hot topics
🕵️♀️ SSB Probe 🕵️♀️
The Legal Services Board (LSB) has announced that it will be carrying out an independent review of the SRA’s regulatory actions following the collapse of the law firm SSB Group. They will be adding this review to the current review of SRA’s intervention (or lack thereof) relating to the collapse of Axiom Ince and the missing £60m+ of client money. It will definitely be interesting to read their findings when released this Summer!
🔍 SQE Review 🔎
The SRA’s year two review of the Solicitors Qualifying Examination (SQE) has shown “ it continues to perform well and there can be confidence in this rigorous assessment.” What’s that you say? I didn’t say anything. I thought you said something? 😬
Key findings from the SQE Independents Reviewers report:
- The overall pass rates for SQE1 was 51% (January sitting) and 53% (July) – broadly in line with last year’s results, with higher pass rates for candidates sitting for the first time.
- The overall pass rate for SQE2 was 75%. Pass rates were higher for those who had previously sat SQE1 (88%) than for those who had not (66%).
- Apprentices continued to perform comparatively well across both assessments, especially in terms of SQE2 which tests legal skills as well as knowledge. 97% passed SQE2 in April 2023, compared to 75% of non-apprentice candidates.
- Candidates with higher university degree classifications were more likely to perform better in the assessments.
As we celebrate these successes let’s also take a moment also to think of the 175 poor souls who were told that they had failed when they had not: https://www.legalfutures.co.uk/latest-news/actually-you-passed-175-sqe-candidates-let-down-by-marking-error
⭐ SRA consults on potential regulation of CILEX students and paralegals
The SRA have have launched a consultation on rule changes needed to allow the potential regulation of non-authorised Chartered Institute of Legal Executives (CILEX) members. The consultation on potential arrangements for non-authorised CILEX members closed on 15 May 2024.
Tribunal trends and cases of interest
Solicitors (Allegedly) Behaving Badly….
- A dine & dash solicitor who failed to pay their bill at a Harvester restaurant has been struck off. In a separate incident, the solicitor also failed to pay for a Just Eat order, pretending to the driver she had paid for the food at the point of order, leaving the poor driver out of pocket as the cost of the meal was taken from his wages ☹
- A solicitor who was fined £20,000 5 years ago for loaning a client money at 60% APR clearly didn’t learn his lesson as he’s just been fined a further 30k for misleading the SDT about other loans and acting for clients despite conflicts of interest.
- A solicitor involved in her husband’s distribution of unauthorised medications and controlled substances, along with engaging in money laundering, has been struck off.
- This solicitor was fined £1,000 with costs of £300 after being convicted of driving whilst under the influence of alcohol.
- A rather expensive cuppa. A law firm administrator has been barred from the profession after paying herself £1,450 in pre-signed cheques between 10 October 2022 & 12 January 2023. She said she did this to refund herself office expenses, such as tea, coffee & sugar.
- Don’t lie! (It really isn’t rocket science) A paralegal got themselves into some rather hot water with his prospective employers when he embellished his qualifications on his CV. His dishonesty has led to him having to pay costs of £1,350 and he is no longer allowed to work as an employee, manager, head of legal practice or head of finance and administration in any law firm regulated by the SRA. As tempting as it might be to “improve” your CV, make sure you don’t cross the line into dishonesty. The consequences can be career ending & costly.
- I repeat, don’t lie! A solicitor got himself a written rebuke from the SRA after he took it upon himself to reject both offers made by the opposing solicitors in a personal injury litigation case, stating that he was doing so on his client’s instruction despite not receiving any such instruction from his client or providing any advice about either offer. It is so easy to get caught up in the litigation but remember that it is your client’s case not yours. You must disclose material information to them and get their buy in on the decision making.
Anti Money Laundering cases
- Following a desk based review of their AML compliance, this firm was fined £12,181 with costs of £1,350 for:
❌ failing to have in place a documented assessment of the risks of money laundering and terrorist financing to which its business was subject (FWRA) pursuant to Regulation 18(1) and 18(4) of the MLRs 2017.
❌ failing to establish and maintain fully compliant PCPs (policies, controls and procedures) to mitigate and effectively manage the risks of money laundering and terrorist financing, identified in any risk assessment pursuant to Regulation 19(1)(a) of the MLRs 2017, and regularly review and update them pursuant to Regulation 19(1)(b) of the MLRs 2017.
- This firm was fined £9,000 for various AML failures, including accepting over £500,000 from an unconnected third party from outside of the jurisdiction and failing to carry out proper customer due diligence checks.
- And again, another firm with multiple historic AML failures including not having a compliant Firm Wide Risk Assessment (FWRA) in place, failing to establish & maintain PCP’s & failing to provide AML training to staff.
- It’s getting a bit repetitive now! A firm hit with a fine (£6,663) for failing to have a compliant Firm Wide Risk Assessment (FWRA) in place & therefore breaching Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs 2017).
- The Solicitors Disciplinary Tribunal (SDT) judgement in Clyde & Co’s mammoth £0.5 million fine has been published. The firm came in for some criticism in the judgement which could serve as a cautionary tale to other law firms dealing with possible problems: “The misconduct was aggravated by the fact it was repeated and included missed opportunities to correct earlier errors…” and “The firm had initially sought to blame Mr Mills-Webb for the entirety of the failings. Clearly, in light of his own admissions, some of that blame was justified. However Clyde & Co had failed to reflect on its own role until a late stage and had not focussed enough attention on its own weaknesses in procedures and policies until recently”.
- This solicitor was fined £11,013.7 with £1,350 costs for a number of failings; ☹ on 6 separate occasions, allowing the firm’s client bank account to be used for payments and transfers on his and his family’s conveyancing matters which were unrelated to an underlying legal transaction. ☹ he acted on the sale of a property from a mother to her son. The sale was at an undervalue. The solicitor failed to undertake adequate client due diligence even though the transaction had unusual features and contained ‘Red Flag’ indicators as highlighted in the SRA Warning Notice on Money Laundering and Terrorist Financing. ☹ failed to ensure that the identity documents received from a third party were checked and verified and that they complied with the firm’s internal anti-money laundering procedures.
The message from the regulator on AML is becoming deafening. If you’re not completely confident on AML get some help with a proper audit and training. We can help by all means but however you do it just please be sure to do it.
Accounts Rules
- This solicitor was fined £5,411 with costs of £600 for, among other things:
❌ failing to complete client account reconciliations on a five weekly basis
❌ book-keeping failings.
More of those fixed penalty fines…
- A firm was fined for failing to;
❌ promptly notify the SRA of a material change to the information it had previously provided to the SRA about its COFA in breach of paragraph 3.8(a) of the Code of Conduct for Firms.
❌ failing to remedy this breach after being given notice and reasonable time in which to do so. - This firm was given a fixed penalty fine for allegedly breaching the SRA’s transparency rules in respect of perceived shortcomings in the following areas: ❌ its complaints procedure, including how and when a complaint can be made to the Legal Ombudsman and to the SRA
❌ its SRA number and the SRA’s digital badge in breach of rules 2.1 and 4.1 of the Transparency Rules.
We have been harping on about websites for a while now, in particular the changes to the LeO reporting timescales. Please check your websites! Or ask us to do that for you!
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