The latest SRA AML report showed a 66% increase in enforcement actions, resulting in fines totalling over half a million pounds. This increase follows reforms to the SRA’s approach to financial penalties, which came into effect in mid-2023.
Under the new framework, penalties are typically determined as a percentage of a firm’s annual domestic turnover, up to a maximum of 5%. The aim of this change is to deter repeat offenses and uphold public confidence in the legal profession.
The SRA has been clear about its mission, partly driven by government pressure, to crack down on firms that lack adequate systems to prevent money laundering.
While the SRA’s annual thematic review identified key industry-wide issue, such as inadequate risk assessments and poor management of Source of Funds checks, recent enforcement actions also highlight specific faults law firms should address.
Lessons to be learned from recent enforcement actions
We’ve reviewed some of the SRA’s most recent enforcement actions and identified key takeaways for law firms:
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Failing to act on AML alerts
In recent years, law firms have been encouraged to adopt technology to strengthen their compliance protocols, including automated screening and ID verification tools. While these technologies offer significant benefits and reduce manual tasks, they cannot eliminate the need for human intervention. A well-designed compliance platform should flag potential issues and alert users when further action is required. However, one law firm was fined for ignoring alerts generated by their software and leaving flagged issues unresolved. In this case, the software functioned correctly, but the firm failed to take appropriate action.
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Over-reliance on ‘local knowledge’
The SRA has raised concerns about firms using familiarity or “local knowledge” as a justification for bypassing steps in customer due diligence. Legal professionals are responsible for verifying and confirming the accuracy of client information. If you are pressured to skip due diligence steps because of familiarity with a client, this could itself be a red flag. Such clients may deliberately choose your firm, hoping to avoid scrutiny.
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Mishandling client funds
Handling client funds poses significant risks, as law firms can become directly involved in the layering of illicit funds. Funds originating from a trusted source, such as a solicitor’s firm, are less likely to raise suspicion further down the line. In one case, a law firm was reprimanded for distributing client money to multiple accounts over an extended period without conducting additional due diligence. In another case, a firm was fined for accepting funds without carrying out any customer due diligence and failing to perform enhanced checks on funds from high-risk territories.
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